On May 22, market analyst Martin Arnold wrote that German wages are growing at the fastest rate in nearly 10 years, indicating that the entire Eurozone economy is picking up, and makes people wonder to what extent the ECB will cut interest rates drastically this year.
According to data including one-time bonuses released by the Bundesbank on Wednesday, collective wage agreements reached between German labor and management rose 6.2% in the first three months of this year, up from 3.6% in the previous quarter. Economists said that German data and data from other countries showed that the overall wage growth rate in the Eurozone rose to 4.7% in the first quarter, up from 4.5% in the previous quarter.
As shown in the chart below, German workers experienced the biggest increase in wages in 10 years
For investors who want the ECB to cut interest rates continuously, the accelerated rise in German wages will be a setback. The market generally expects the ECB to take the lead in cutting interest rates on June 6.
The ECB said that the timing of interest rate cuts depends on whether workers' salary increases are low this year and whether these additional costs are absorbed by corporate profit margins cuts rather than being passed on to higher prices.
Wage growth in the first quarter was stronger than expected, meaning that policymakers are unlikely to agree to cut interest rates for the second time in a row in July, and are more likely to wait until September. On Wednesday, the yield on Germany's interest-sensitive two-year treasury bonds rose above 3% for the first time in three weeks as investors lowered expectations of interest rate cuts.
T Rowe Price analyst Tomasz Wieladek said, “This will pose a major challenge to the idea that the ECB will cut interest rates continuously. The ECB is still likely to cut interest rates in June, because this was basically announced in advance, and it is difficult to deviate from this forward-looking guidance at this stage.”
Over the past few months, ECB policymakers have been sending strong signals that as long as inflation does not exceed their expectations, they may begin to lower the benchmark deposit rate from the historic high of 4% set in June.
ECB President Christine Lagarde said this week that “if the data we receive strengthens our confidence that we will meet the 2% inflation target in the medium term,” then it is “very likely” that the ECB will cut borrowing costs at the June meeting. Eurozone inflation stabilized at 2.4% in April and has declined from a peak of more than 10% in 2022. Lagarde said the inflation rate was “under control.”
EURUSD daily chart
On May 23, Beijing time, EUR/USD was reported at 1.0823/24