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The ECB's chief economist said inflation is easing, and wage growth will slow.

TraderKnows
TraderKnows
08-30

On Thursday, August 29th local time, European Central Bank Chief Economist Philip Lane stated that the primary driver of inflation in the Eurozone—wage growth—will significantly slow down in 2025 and 2026.

At the Frankfurt meeting on August 29, European Central Bank Chief Economist Philip Lane highlighted that a key driver of Eurozone inflation—wage growth—is expected to slow significantly in 2025 and 2026. According to the ECB's wage growth tracker, wage growth remains robust in the second half of this year, but "the current momentum has peaked," and the increase is expected to slow noticeably over the next two years.

Data released by the ECB last week showed that the growth of negotiated wages in the second quarter fell to 3.55% from 4.74% in the first quarter, primarily due to a significant slowdown in wage growth in Germany. The ECB has long regarded negotiated wages as a key factor in policy formulation.

Some investment bank analysts noted that the growth of negotiated wages had already peaked in the first quarter. This trend indeed alleviates the ECB's senior officials' concerns that "rising labor costs could fuel inflation," supporting a potential rate cut in September.

In June this year, the ECB cut the main refinancing rate, the marginal lending rate, and the deposit facility rate by 25 basis points to 4.25%, 4.5%, and 3.75%, respectively, marking the first rate cut since 2019. However, at that time, President Lagarde emphasized that inflationary pressures still existed.

Currently, investors broadly anticipate that the ECB will further cut rates two to three more times this year and take additional easing measures in 2025. Lane indicated that the central bank has made "significant progress" in reducing underlying price pressures and is optimistic about the slowdown in wage growth.

Lane emphasized, "This is the source of our confidence in returning to the target." It is worth noting that Lane is considered a "dovish" member among ECB policymakers, while some "hawkish" officials argue that more data is needed to support the rate-cut decision.

This Friday, Eurostat will release the preliminary inflation report for August, with market expectations that the year-on-year inflation rate in the Eurozone will fall from 2.6% in July to 2.2%. Just before the release, Germany's latest inflation data supported this optimistic expectation.

As the largest economy in Europe, Germany's preliminary August CPI annual rate was 1.9%, below the 2% inflation target, with the market previously expecting this figure to slow to 2.1%. Earlier, Spain's inflation data also showed an unexpected cooling trend.

Dutch economist Carsten Brzeski said that Germany's unexpectedly sharp decline in the inflation rate is good news for the ECB, "This indicates a broader disinflation trend that goes beyond the impact of energy prices."

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