European Central Bank board member Isabel Kocher said Tuesday that the institution has not observed second-round effects emerging in the euro area, pushing back against market speculation that persistent wage growth could force further interest rate increases.
Kocher’s remarks at a Frankfurt event
Speaking at a monetary policy conference in Frankfurt, Kocher told attendees that the ECB’s analysis of wage negotiations and corporate pricing behavior has not revealed the classic pattern of second-round effects that central bankers fear. “We are monitoring the data closely, and at this stage, we do not see evidence of second-round effects materializing,” Kocher said, according to remarks published on the ECB’s website.
Also read: Silver price stalls near $60 as US Treasury yields rally: what it means for XAG/USD
Second-round effects refer to the process by which an initial price shock — such as the surge in energy costs in 2022 — feeds into higher wage demands, which then push up prices across the broader economy, creating a self-reinforcing loop. Central banks view them as a key risk that can turn temporary inflation into a persistent problem.
What this means for ECB rate policy
Kocher’s comments come as markets debate whether the ECB will continue cutting interest rates after lowering its deposit rate to 3.25% in October 2024 from a peak of 4%. Some analysts had warned that strong wage growth in the eurozone, particularly in Germany and the Netherlands, could reignite inflationary pressures and delay further easing.
Also read: Softer UK CPI data reinforces case for prolonged Bank of England hold, TD Securities says
By stating that second-round effects have not emerged, Kocher signals that the ECB’s governing council sees room to maintain its current easing trajectory without immediate concern that wage pressures will derail inflation’s return to the 2% target. The euro area’s headline inflation rate fell to 2.3% in November, down from a peak of 10.6% in October 2022, though core inflation has proven stickier.
Wage growth and productivity: a key distinction
ECB economists have noted that while nominal wages are rising at an annual pace of around 4-5% in several eurozone countries, productivity growth has also improved in some sectors. When wage increases are matched by productivity gains, they do not necessarily feed into higher unit labor costs — a critical factor that can break the link between wages and inflation.
Kocher emphasized that the ECB is looking at the “full picture” of labor market dynamics, including profit margins and productivity data, rather than reacting to headline wage numbers alone. This nuanced approach suggests the ECB is wary of tightening policy prematurely based on incomplete data.
Market reaction and outlook
Financial markets interpreted Kocher’s remarks as dovish, with the euro edging lower against the dollar and eurozone bond yields dipping slightly in afternoon trading. Investors now assign a roughly 70% probability to a quarter-point rate cut at the ECB’s January meeting, according to swaps pricing.
The ECB’s next monetary policy decision is scheduled for January 30, 2025, when the governing council will also publish updated macroeconomic projections. Kocher’s assessment will be weighed against incoming data on services inflation and negotiated wages, which the ECB has identified as key variables for its policy path.
