Euro zone wage growth to peak early in 2024, path further ahead unclear -new ECB tracker

FRANKFURT (Reuters) – Euro zone wage growth is likely to peak early this year but the path further ahead remains uncertain, a new forecasting tool developed by the European Central Bank showed on Friday.

The ECB has singled out wages as the single most important variable in determining whether it can start cutting interest rate and call time in fight against high inflation.

Its new wage tracker, detailed for the first time in a paper published on Friday, showed growth in compensation was seen hitting a peak at around 5% early this year.

But the jury was still out on whether and how quickly pay rises would fall back towards the 3% level that the ECB considers compatible with its 2% inflation goal.

“Negotiations over the first quarter of 2024 are likely to be decisive for the development of wage pressures over 2024,” the authors of the paper wrote.

Often cited by ECB chief economist Philip Lane, the ECB’s new tracker uses data from individual pay agreements in Germany, France, Italy, Spain, the Netherlands, Austria and Greece to estimate wage pressures and gauge sentiment.

The ECB then tries to forecast future wage-settlement growth based on how key macroeconomic variables tend to predict pay deals in each country.