Eurozone Negotiated Wage Growth Lowest in 3 Years

Negotiated wages in the Euro Area rose by 2.95% year-on-year in the fourth quarter of 2025, accelerating from an upwardly revised 1.89% in the previous quarter, signaling a pickup in pay growth but remaining well below the 5.4% peak seen in 2024. The rebound supports the ECB’s view that there is no immediate need to cut interest rates further, as wage dynamics remain consistent with a gradual easing in inflation pressures. After keeping its deposit rate at 2% for a fifth consecutive meeting, ECB President Christine Lagarde emphasized close monitoring of salaries given their impact on services inflation, which remains above 3%. The ECB expects inflation to stabilize around its 2% target as wage growth moderates, though it sees the risk of slower wage easing as an upside inflation threat. At the same time, policymakers are wary of an excessive slowdown in pay, with Euro Area inflation having fallen to 1.7% in January and projected to stay near or slightly below 2% in the coming years.

Negotiated wages in the Euro Area rose by 3.95% year-on-year in the second quarter of 2025, accelerating from an upwardly revised 2.46% in the previous quarter, complicating the European Central Bank’s path on interest rates. The ECB has stressed that easing inflation to its 2% target depends on slower pay gains and cooling price pressures in services, where inflation remains stuck near 3%. While the Bundesbank noted a strong rise in German wages this quarter, it also expects moderation ahead as inflation eases and the economy stays weak. The ECB’s own pay tracker points to softer wage growth into next year, offering some reassurance. Still, the recent jump underscores why policymakers remain cautious about cutting rates further. Markets widely expect the ECB to keep its deposit rate at 2% in September, continuing a pause after a year of reductions, though some officials argue additional cuts should remain an option.

Negotiated wages in the Euro Area increased by 2.38% year-on-year in the first quarter of 2025, slowing sharply from 4.12% in the previous quarter. This marked the smallest increase since Q4 2021, supporting the European Central Bank’s view that wage-driven inflation pressures are easing. The slowdown in pay growth bolsters the case for further interest rate cuts, with the ECB expected to reduce rates again next month. Services inflation, which is heavily influenced by wages, rose 4% in April, but overall inflation held steady at 2.2%. The European Commission expects inflation to fall to 2% by mid-2025 and dip below that in 2026. Recent wage agreements suggest workers are struggling to secure large pay hikes, with Germany’s public sector agreeing to a 5.8% raise spread over two years. An ECB wage tracker also points to further moderation later this year.