The European Central Bank (ECB) and the “doves” of the Governing Council had everything they needed to argue in a simple and energetic manner on the future series of rate cuts in the euro zone. Inflation has moderated for months, the price of oil fell sharply last year and wages have started to moderate. The “hawks” (who defend a more restrictive monetary policy) were short of claws to try to defend their position against the “doves” (who defend a more expansive monetary policy). However, when this battle appeared to be over, an impressive figure on negotiated salaries published this Wednesday (this is not the first time that wages surprise) calls on the central bank again and threatens to shorten the horizon of aggressive cuts projected for 2025. To date, the ECB has lowered its rates three times this year, thus becoming the highest deposit rate. from 4% to 3.25%. The abrasive data published by the ECB this Wednesday does not for the moment trigger a further decline in December.
The growth of negotiated wages in the euro zone reached 5.42% year-on-year, this is the largest increase since the fourth quarter of 1993. This strong rebound constitutes a new challenge for the ECB, which has until now relied on a sustained slowdown in inflation to justify a possible cut in interest rates in the months to come. However, rising labor costs could significantly complicate this roadmap. In anticipation of this, investors have all but written off a 2025 rate cut in one fell swoop. exchangesoperators are discounting a rate of 1.88% for October 2025 compared to the 1.66% they were betting on 24 hours ago. About 22 basis points less, which is close to 25 of each “standard” central bank cut or increase.
Before the data was known, economists’ analyzes indicated Germany, where negotiated wages increased significantly to 8.8% year-on-year in the third quarter compared to 3.1% year-on-year in the second quarter. Even excluding special payments, wages increased by 5.6%, indicating substantial increases. Already in previous quarters, German wages pushed up the overall eurozone figure, not least because of one-off payments, wage increases in a single – unconsolidated – payment that triggered the index, but which would dissipate in the future.
“For the ECB, the most important thing is the outlook for wage growth and thus previous developments. The German Bundesbank expects future wage negotiations to moderate due to economic weakness and falling inflation However, current strong wage growth suggests that. services inflation could remain stable in the short termwhich would influence the ECB’s political decisions in a context of uncertainty over the pace of slowdown in wage growth”, emphasizes Danske Bank.
The impact on underlying inflation
The main problem lies in the impact that these wage increases can have on underlying inflation, which excludes volatile components such as energy and food. Although overall prices have shown signs of slowing in recent months, strong wage growth could generate inflationary pressures through two channels: increased production costs for businesses and greater spending capacity for consumers. These two factors could slow down the disinflation process.
For the ECB, which has an inflation target of 2%, the risk is clear. If wage growth does not slow, core inflation could remain elevated for longer than expected. This could force the central bank to keep interest rates high for a prolonged period, delaying expected cuts and prolonging high financing costs for businesses and households. Christine Lagarde, President of the ECB, has already warned in the past against the risks of second round effectsin which a sustained rise in wages fuels an inflationary spiral.
Wages generate “persistent” inflation
In addition, wage growth could increase the resilience of certain economic sectors to the effects of restrictive monetary policy, such as slowing domestic demand. If consumers see their incomes rise significantly, it is likely that private consumption will remain strong, making it difficult to control inflation by moderating demand.
This context also generates tensions between the different countries of the euro zone, where economic conditions are diverse. “Richer” countries have tighter labor markets, so they could experience greater inflationary pressures, thus complicating the ECB’s task of implementing a single monetary policy suitable for all member states.
The ECB’s dilemma is accentuated because higher wages also have positive effects. On the one hand, They help to mitigate the loss of purchasing power that workers have suffered due to high inflation in recent years.s. On the other hand, they could stimulate sectors that depend on domestic consumption. However, balancing these benefits with controlling inflation will be a crucial challenge for the Frankfurt institution.
In terms of monetary policy, the ECB will need to think carefully about its next steps. Even if general inflation is in a process of disinflation, the persistence of underlying wage-driven inflation could lead the ECB to rule out a short-term rate cut and even to keep open the possibility of further increases if inflationary pressures are intensifying.
A dead cat bouncing?
Not all analysts view the data with such concern. Frederik Ducrozet, Pictet strategist who follows ECB news, considers that this figure is “the economic equivalent of a dead cat rebound”. This concept is used in the stock market world to designate a slight and brief recovery in the price of a falling stock. The expression, originating from Wall Street, stems from the idea that “Even a dead cat bounces if it falls from a very high height”. “This is old news, driven by German bonuses (one-off payments) and which contrasts with the IG Metall salary agreement, the other ECB salary indicators and the growth prospects,” adds Ducrozet.
The salary agreement IG MetalGermany’s largest industrial union, to which the analyst refers, was closed this week. It envisages a salary increase of 2.0% in 2025 and 3.1% in 2026, plus a one-off payment of 600 euros in 2025 (compared to 1,400 euros in 2024). The small increase for 2025 reflects lower bargaining power in German industry. With 3.9 million members, the IG Metall deal provides a key benchmark for other sectors and could also influence the ECB’s December forecast for wage growth next year, supporting the case for of consecutive rate reductions in 2025.
Capital Economics is of the same opinion. “Although the increase in negotiated wage growth suggests that labor compensation growth per employee will also have increased in the third quarter, the most recent indicators point to a reduction in underlying wage pressures. By design, negotiated wage growth is a delayed indicatorbecause it includes all agreements currently in force, regardless of when they were signed, which means that it does not detect turning points as quickly as just recently agreed salary indicators,” explains its analyst Elias Hilmer. The economist considers that the softening of the eurozone labor market and lower inflation suggest that workers will demand lower raises nominal wages in 2025.
