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Wages in Germany rose to the highest level in nearly a decade, signaling a recovery across the euro zone and raising questions about how aggressively the European Central Bank will cut interest rates this year.
Collectively agreed wages in Germany rose by 6.2% in the first three months of this year, accelerating from 3.6% in the previous quarter, according to Bundesbank figures released on Wednesday that include one-time bonuses.
Economists said German figures and data from other countries suggested annual gross wage growth in the euro zone was 4.7% in the first quarter, up from 4.5% in the previous quarter. Eurozone-wide figures will be released on Thursday.
The acceleration in wage growth will be a setback for investors who were hoping for a series of rate cuts from the ECB, which is widely expected to become the first major central bank to do so on June 6.
The euro zone central bank said the timing of its interest rate cuts will depend on whether workers will see lower wage increases this year and whether companies will do so by cutting their profit margins rather than passing on the additional costs through higher prices. He said that it depends on whether they can absorb the changes.
Faster-than-expected wage growth in the first quarter means policymakers are unlikely to agree on a second consecutive year of cuts in July and are more likely to wait until September. Yields on Germany's interest rate-sensitive two-year bonds rose above 3% for the first time in three weeks on Wednesday as investors cut expectations for rate cuts.
“This would be a significant challenge to the idea that the ECB would cut rates gradually,” said Tomasz Wiladek, an economist at investment firm T. Rowe Price. “The ECB is still likely to cut rates in June. This is essentially pre-announced and it would be difficult to deviate from forward guidance at this stage.”
ECB policymakers have been sending strong signals for months that they are likely to start cutting the benchmark deposit rate from a record 4 percent hit in June unless inflation rises more than expected.
ECB President Christine Lagarde said this week that “if the data we receive strengthens our confidence that we can achieve 2% inflation in the medium term,” it is “possible” to lower borrowing costs at the June meeting. It's very sexual,” he said.
Inflation in the euro zone was stable at 2.4% in April, down from a peak of more than 10% in 2022, and Lagarde said it was “under control”.
But other ECB policymakers have warned investors not to expect back-to-back rate cuts in June and July. “Even if we cut interest rates for the first time in June, that does not mean we will cut them further,” Bundesbank President Joachim Nagel said this week. “We are not on autopilot.”
“Wide-spread labour shortages and a high willingness to strike have allowed trade unions to achieve above-average enforcement rates recently, suggesting that wage growth will remain relatively high in the future,” the German central bank said.
The report said the recent labor wage agreement, which raised annual wages by an average of 11.7% in March, is likely to result in wage growth in Europe's largest economy, particularly in the service sector, remaining high. He said that it shows that. According to the report, unions are demanding annual wage increases of 7-15%.
Greg Fuzeshi, an economist at US bank JPMorgan, said the latest wage data “could remind policymakers of the difficulties of the 'last mile'.” [in bringing inflation down to target] The recent decline in productivity also plays a role in this.”
But he said the institutionalized nature of wage negotiations in Germany meant that raises were “slow to materialize” and that wage growth had slowed in other countries, so the broader trend of easing wage pressures remained largely unchanged. , he added.
