(Bloomberg) -- Pay growth for workers in the euro zone — a key driver of inflation — will slow sharply in 2025 and 2026, according to European Central Bank Chief Economist Philip Lane.
The second half of this year will still see “plenty of wage increases,” Lane told a conference Thursday in Frankfurt, citing the ECB’s own tracker of salary trends. But “the catch-up is peaking now” and there’ll be a much less rapid pace in the next two years, he said.
Lane’s comments come just two weeks before officials must decide whether inflation is retreating sufficiently to allow a second reduction in interest rates following June’s initial move. Several policymakers have endorsed such a step in recent days, while others say they’re awaiting more information.
A big boost came last week as figures showed that the rise in negotiated wages moderated in the second quarter.
Data on Friday are likely to show a steep slowdown in euro-area inflation in August, to 2.2% from 2.6% the previous month, according to economists polled by Bloomberg. The ECB only expects it to sustainably return to the 2% goal at the end of 2025 and sees a lot of uncertainty around the outlook.
Investors are betting on two or three more ECB cuts this year, with additional steps to follow in 2025. Lane noted a “lot of progress” in bringing down underlying price pressures, highlighting rising optimism over the slower pay gains.
“This is where the confidence in returning to target comes from,” he said.
©2024 Bloomberg L.P.