Wage growth could slow future ECB rate cuts after June meeting   

Analysts take for granted an ECB rate cut in June, but also highlight that markets have started pricing in fewer cuts thereafter

Increase in negotiated wage settlements in the first three months of the year will 'raise alarm bells' among ECB policymakers.

A pick-up in wage inflation across the eurozone will not derail prospects for the European Central Bank (ECB) to start cutting interest rates early next month, but may mean future rate cuts through the rest of the year will be delayed, consultancy Capital Economics has warned. 

The increase in so-called negotiated wage settlements in the first three months of the year was "almost entirely" down to German wage deals but will nonetheless "raise alarm bells among ECB policymakers, who want to see wage growth slow before they start cutting interest rates", Jack Allen-Reynolds, deputy chief eurozone economist at the consultancy, said in a commentary. 

"If there is no major surprise from the May inflation data, we think the ECB will follow through with its plan to cut interest rates in June as that move has been very clearly signalled," Mr Allen-Reynolds said. 

"But the latest wage numbers put a question mark over our forecast for a rate cut in July and mean the pace of rate cuts in the second half of the year may be slower than we had anticipated," he said. 

Financial markets have in recent weeks reined in their expectations for hefty rate cuts this year, even as headline eurozone inflation rates close in on the ECB's 2% inflation target. 

Households and businesses are anticipating a quarter point cut when the central bank next meets in Frankfurt on June 6, and Irish lenders have already cut some of their fixed-rate mortgages, as well as fixed rates on their savings products. 

Further relief for borrowers may be limited this year should the ECB take alarm over inflation and wages as major eurozone economies recover sharply. 

Analysts take for granted an ECB move in June, but also highlight that markets have started pricing in less than the cut every quarter thereafter, which had been implied by derivatives in the last few months.

"The market repricing since April had already taken out much of the probability for cuts at 'in between' meetings, but it is now starting to challenge quarterly cuts, with around 65 basis points priced to year-end," Citi analysts said in a research note. 

• Additional reporting Reuters