ECB, hypothesis of a quarterly rate cut
THE wages negotiated in the euro area fell to 3.6% in the second quarter from 4.7% in the first quarter of 2024. At first glance, this is significant progress in bringing wage growth into a range consistent with the aim of the 2% of the ECB. However, the data is not as rosy as it seems.
After all, this is not the only wage indicator taken into account by the ECB. The Indeed Index on wages is rising. And the ECB has always maintained that the Indeed survey is a very good leading indicator of 6-9 months.
Furthermore, since the markets of work remain resilient, with a strong employment growthbut with a modest growth of the productionproductivity in the euro area continues to decline. The decline in productivity means that wage growth of less than 2% is needed for costs to increase by 2%.
Even today’s wage data is still far from this level of wage growth. Finally, the PMI index services inflation this morning has risen again. This is worrying. ECB research suggests that this index has been a good indicator of future services inflation in the euro area in recent years. This makes a strong IPCA inflation of services in the coming months.
Overall, I still believe that the ECB will only cut gradually. Normally, the ECB would react more strongly to weakening manufacturing surveys. But in recent years, manufacturing surveys have been less correlated with the real economy.
Furthermore, the inflationary pressure still seems too persistent. This makes it difficult to cut at every meeting. But cutting once a quarter is still doable. This is a path of monetary policy much more aggressive than what the markets are currently pricing in.
*Chief European Economist, T. Rowe Price
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