The central bank is expected to cut interest rates in June, but a rise in workers’ wages could affect the pace of cuts, Politico reports.

The European Central Bank is going to maintain currently its base rate at 4%as concerns about wage growth dampen the need to provide more support to the economy.

At the last Governing Council meeting in March, the President of the ECB Christine Lagarde had indicated that the bank could start easing interest rate policy in June with analysts, however, reporting that nothing substantial has happened to change this in the interim.

According to Politico, core inflation continued its downward trend in March, hitting a two-and-a-half-year low of 2.4%, thanks mainly to food and energy prices, but service price inflation, weighed down by largely driven by local wage developments, remained stubbornly high at 4%. With survey data suggesting the economy has bottomed out in the near term and unemployment still near record lows, it all spells another month of waiting.

Gilles Moëc, chief economist at AXA Investment Management, said it was increasingly likely that wage growth would slow to a level that would reassure the ECB.

“There has already been a slowdown in negotiated wages in Q4 2023 in the euro area,” it argued in a note on Tuesday. “A recent Banque de France survey signals a slowdown in wages in France, and imperfect but useful real-time indicators such as the Indeed tracker point to a larger slowdown in early 2024 across the eurozone.”

The bank will also have to face the risks of maintaining too tight a policy for too long. On Tuesday, the ECB’s quarterly survey of bank lending showed that business credit demand fell sharply in the first quarter, dashing hopes for a rebound in investment later this year.
The survey highlighted the gap in economic performance between Europe and the US, where activity has steadily defied fears of a slowdown. At the start of the year, financial markets expected a rapid easing cycle on both sides of the Atlantic, but strong economic data and recent communication from the Federal Reserve led markets to abandon that belief. The weakness of the eurozone economy, by contrast, has kept the repricing of the ECB’s expectations relatively modest.

Concerns about the state of the bloc’s economy and its competitiveness vis-à-vis the US and China have become a dominant issue at EU level. Heads of government will meet on April 17-18 and are set to call for more attention to the issue of restoring competitiveness , based on an in-depth report by former Italian Prime Minister Enrico Letta on the future of the single market.