Will Europe Follow the US in Raising Interest Rates? The Biggest Variable is the 'Wage Growth Rate'

Lagarde President's More 'Hawkish' Remarks Than Last December at Press Conference
Reaffirms Intention Not to Rush Interest Rate Hike Decision
Possibility of Rate Hike Increases if Wage Growth Accelerates

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The European Central Bank (ECB) showed a hawkish (tightening) stance, moving away from its previous position that the likelihood of a rate hike was very low. As the possibility of a rate hike this year arises, the wage growth rate in the Eurozone is expected to be the most important variable.

Yang Ji-sung, a researcher at Samsung Securities, stated, "ECB President Lagarde, during the press conference, did not rule out the possibility of a rate hike within the year, showing a change from the stance two months ago that 'the possibility of a rate hike this year is low.'"

Researcher Yang pointed out, "What should be noted is that President Lagarde did not exclude the possibility of a rate hike in 2022," adding, "At the press conference last December, she said that the possibility of a rate hike this year was 'very unlikely.'"

Earlier, on the 3rd (local time), ECB President Christine Lagarde mentioned at the press conference following the monetary policy meeting, "Inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year."

Although this can be interpreted as not significantly different from previous remarks, her response to a question about the possibility of a rate hike within the year?"We will be able to obtain additional data in March, and at that time we can reassess the situation"?drew attention. Researcher Yang evaluated this as "effectively indicating that the ECB will reevaluate its existing monetary policy normalization plan at the March meeting."

Immediately after the ECB meeting, the euro strengthened by +1.2% against the dollar, German 2-year yields rose by 13 basis points, and German 10-year yields increased by 10 basis points. Based on the German 2-year yield, this is the highest level since 2015. The market interpreted the relatively hawkish press conference as reflecting the ECB’s outlook on monetary policy normalization.

Researcher Yang identified the 'wage growth rate within the Eurozone' as a key variable for future monetary policy.

He explained, "The Eurozone Core Consumer Price Index (Core HICP) is closely related to wage growth. During periods when the Eurozone Core HICP exceeded 2%, the Eurozone wage growth rate also exceeded 2%, but currently, the annual wage growth rate in the Eurozone is only 1.4%."

Despite low unemployment rates and economic participation rates at pre-COVID-19 levels, wage pressure is still not significant.

Researcher Yang added, "If it is confirmed that wages are under upward pressure in the future, the ECB’s monetary policy signals are expected to become clearer."