(Bloomberg) -- The European Central Bank’s main gauge of future euro-zone pay growth continued to signal a sharp slowdown in 2025, underpinning hopes for a further retreat in inflation that should allow more interest-rate cuts.
The ECB’s wage tracker, published Wednesday, predicts salaries rising by an annual 1.5% in the fourth quarter of 2025. While that’s up a touch from the 1.4% projection seen in December, it’s way down from the 5.3% peak recorded a year earlier.
The indicator provides policymakers with a timely update on salaries to help them assess how best to adjust borrowing costs. They reduced the deposit rate for the fifth time this cycle last week, to 2.75%.
The ECB’s confidence in reaching its 2% inflation target this year rests on the expectation that wage increases moderate and inflation in the labor-intensive services sector — stuck near 4% for more than a year — abates.
After January’s monetary-policy meeting, President Christine Lagarde said “all the indicators that we have at the moment are heading downward and are confirming our confidence that wages in 2025 will be going down.”
She referred to the ECB’s tracker, but also compensation per employee, a separate indicator provided by Indeed and an ECB poll of firms — the so-called Corporate Telephone Survey — which was released Friday.
The ECB’s December outlook foresees a sustained decline in salary growth — to 2.8% in 2027 from 4.6% last year.
Many economists agree, as the catch-up with the record spike in consumer prices looks almost complete and the region’s economy struggles to expand. Some even fret that the slowdown could go too far.
Jens Eisenschmidt, chief European economist at Morgan Stanley and a former ECB economist, said negotiated wages lower than 2% after August 2025, as envisaged by the ECB’s tracker, “would not be very far away from the pre-Covid dynamics and clearly the material from which an inflation undershoot is made.”
Adding to such concerns, last year’s settlement for workers in Germany’s manufacturing sector by the IG Metall union also locked in relatively moderate pay gains for the next two years.
While the ECB needs salary growth to slow, it doesn’t want too steep a deceleration, nor a shapr deterioration in the labor market.
Chief Economist Philip Lane said last October that a more robust jobs market “increases the likelihood of hitting the inflation target rather than being chronically below,” and that “wage increases would be more target-consistent in the coming years” than pre-pandemic.
Some analysts, though, are more concerned that part of the recent pressures will remain due to tight job markets and record-low unemployment — especially if the expected economic recovery kicks in.
“We see the pronounced easing of wage pressures in 2025 as a temporary phenomenon,” said Holger Schmieding, chief economist at Berenberg. “With growth slightly above the euro zone’s trend rate in 2026, structural labor shortages will come to the fore again more strongly.”
He expects pay increases to quicken again next year, to about 4% — one reason why he sees inflation exceeding 2% in the medium-term.
Marco Wagner, an economist at Commerzbank, also doubts that the rate of wage growth in the second half of 2025 will fall as sharply as the ECB’s tracker indicates.
He highlights that the forward-looking indicator is based on fewer agreements the further into the future it looks and that many collective pacts have a term of two years or more, with salaries usually increasing more in the first than in the second.
The wage tracker “is likely to underestimate wage growth in the second half of the year due to the way it is constructed” — as it was already the case in 2024, Wagner said.
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