Eurozone wage rebound complicates ecb rate cut timing

Friday 20 February 2026 - 11:20

By: Dakir Madiha

Eurozone wage rebound complicates ecb rate cut timing

Negotiated wages in the eurozone picked up again at the end of 2025, with collectively bargained pay rising 2.95% year-on-year in the fourth quarter, according to fresh European Central Bank data released on Friday. The increase marks a clear acceleration from the revised 1.89% recorded in the previous three-month period, when the fading impact of earlier one-off inflation compensation payments had temporarily depressed the headline figure. With those distortions now largely behind it, the latest reading is seen by analysts as closer to the underlying trend in wage-setting across the bloc’s main economies.

The upturn comes after a long retreat from the peak wage pressures that complicated the ECB’s initial attempts to loosen policy following the post-pandemic inflation surge. Wage growth had climbed above 5% at its height, fuelling concern that generous pay deals could lock in higher inflation even as energy and goods prices eased. Since then, successive bargaining rounds and the gradual expiry of inflation-linked bonuses have brought negotiated increases back towards levels more consistent with the central bank’s 2% inflation target. Even so, officials remain alert to the risk that tighter labour markets and catch-up demands in some sectors could re-ignite cost pressures.

Forward-looking indicators suggest wage dynamics are likely to cool further over the next two years, even if the adjustment is uneven from quarter to quarter. The ECB’s wage tracker, updated in mid-February with agreements signed up to mid-January, points to negotiated wage growth with unsmoothed one-off payments of around 3.0% for 2025 as a whole and 2.7% for 2026. That profile would leave pay settlements running slightly above headline inflation, which fell to 1.7% in January, helping restore some of the real income lost during the price shock. The tracker also indicates a more stable pattern in 2026, with wage growth hovering just below 3% through the year and less volatility from bonuses and one-off payments than in earlier bargaining rounds.

The latest figures land at a sensitive moment for monetary policy, as the ECB weighs how quickly it can ease borrowing costs without reigniting inflation. At her early February press conference, President Christine Lagarde said growth in negotiated wages and forward-looking measures such as the wage tracker and wage expectation surveys “point to a continued moderation in labour costs”, while stressing that the impact of additional payments beyond negotiated components remains uncertain. The Governing Council left all three key interest rates unchanged and refrained from signalling when cuts might resume, repeating that any decisions will depend on incoming data on wages, prices and activity.

Business surveys indicate that the eurozone economy is showing tentative signs of improvement just as wage growth steadies. The HCOB flash eurozone composite purchasing managers’ index, compiled by S&P Global, rose to 51.9 in February from 51.3 in January, marking the fourteenth consecutive month of expansion and beating expectations in a Reuters poll. The manufacturing component returned to growth territory, with the factory PMI jumping to 50.8 from 49.5, its highest reading since mid-2022, as new orders moved back into positive territory. The services sector continued to expand, albeit slightly below forecasts, underscoring a still-fragile but broad-based recovery.

With inflation now below target and activity improving, the interaction between wage developments and growth has become central to market expectations for the ECB’s next moves. Annual headline inflation in the euro area slipped to 1.7% in January from 2.0% in December, driven by falling energy prices and a modest easing in core inflation to 2.2%. Investors are debating whether the combination of still-firm but moderating wages, firmer manufacturing output and softer price pressures will justify keeping the deposit rate at 2% for longer or allow cautious rate cuts later in the year. For now, policymakers are signalling patience, arguing that a few more quarters of wage and inflation data are needed to be confident that underlying price pressures are fully aligned with the target.