Economy

ECB sees ‘very strong’ wage growth ahead as more rate hikes planned

European Central Bank indicates likelihood of several years for salaries to adjust fully to recent shocks

The European Central Bank predicts bullish growth in wages and salaries when compared with historical patterns. Photograph: Daniel Roland/AFP via Getty Images

Mon Jan 9 2023 - 12:25

The European Central Bank (ECB) predicts wage growth — a key indicator of where inflation is headed — will be “very strong” in the coming quarters, strengthening the case for more interest-rate hikes.

A study of salary developments since the start of the pandemic shows underlying pay growth has been “relatively moderate and is currently close to its long-term trend”, the institution said on Monday in an article to be published in its economic bulletin.

Even so, “looking ahead, wage growth over the next few quarters is expected to be very strong compared with historical patterns”, it said. “This reflects robust labour markets that so far haven’t been substantially affected by the slowing of the economy, increases in national minimum wages and some catch-up between wages and high rates of inflation.”

With forecasts showing 2 per cent inflation will be elusive until the end of 2025 and trade unions pushing for generous compensation packages, the ECB has delivered an unprecedented series of rate increases that took the deposit rate to 2 per cent last month.

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ECB president Christine Lagarde has flagged another half-point hike at February’s meeting — and possibly at the one after that — to avoid a wage-price spiral.

A look ahead to 2023

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Weaker economic growth is unlikely to help much in the near term, particularly as a shortage of skilled labour encourages businesses to retain workers and pay them well.

It will take several years for salaries to fully adjust to recent shocks, according to ECB chief economist Philip Lane, who has argued that monitoring pay will form a large part of understanding the inflation trend.

In its article, the ECB said “there are signs of stronger wage growth in services sectors, primarily in those lacking staff”.

It also said that “beyond the near term, the expected economic slowdown in the euro area and uncertainty about the economic outlook are likely to put downward pressure on wage growth”. — Bloomberg

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