European Central Bank: Wage growth in the euro area is expected to accelerate in the second half of the year, supporting stable interest rates.

The wage tracker index released by the European Central Bank on Wednesday shows that wage growth in the euro area is expected to accelerate in the second half of the year, supporting the central bank's assessment that interest rates can remain stable. The data shows that wages are expected to increase by 2.7% year-on-year in the fourth quarter of this year, higher than the 2.6% in the third quarter. Although this growth rate is far below the peak of over 5% in 2024, it is still stronger than the forecast for the first half of the year. The European Central Bank stated in a release: "The upward trajectory of wages this year is related to the gradual dissipation of mechanical downward effects caused by large one-time payments made in 2024 but not in 2025. These mechanical effects are expected to largely disappear by 2026." Policy makers' confidence in inflation stabilizing at 2% depends on whether the slowdown in wage growth can help lower price pressures in labor-intensive service industries. ECB President Lagarde stated that she is "closely monitoring" wage trends amidst ongoing uncertainty. The European Central Bank, which has kept interest rates unchanged since June last year, considers wages as a potential risk for upward inflation, mainly due to their impact on service sector prices. Last Thursday, the European Central Bank maintained interest rates as expected and did not provide a clear signal on the next policy direction, reinforcing market expectations for policy stability for some time. The current relatively robust economic growth in the euro area and inflation close to target levels provide room for policy "watchful waiting." Lagarde stated that overall inflation risks are balanced. On one hand, ongoing increases in energy prices, further fragmentation of global supply chains, constraints on key raw material supplies, and defense and infrastructure spending plans could push inflation higher in the medium term; on the other hand, tariffs could weaken eurozone export demand, excess capacity in countries expanding exports to Europe, a stronger euro, and increased financial market volatility could put downward pressure on demand and inflation.