Wage growth threatens further interest rate cuts this summer, hints ECB

The ECB is prepared to cut interest rates at its June 6 meeting, but policy must continue to be restrictive this year as wage growth will not normalise until 2026, said European Central Bank chief economist Philip Lane.

European Central Bank chief economist Philip Lane kept a lid on whether the regulator will implement further cuts after its meeting next week.

While speaking to the Financial Times, Mr Lane indicated policymakers continue to keep a sharp eye on wage growth across the eurozone, which continues to threaten the ECB’s inflation target of 2%.

The ECB is prepared to cut interest rates at its June 6 meeting, but policy must continue to be restrictive this year as wage growth will not normalise until 2026, Mr Lane said. 

Other officials are increasingly being asked what will happen after their planned quarter-point cut in the deposit rate next week.

Most are unwilling to even comment on the subsequent path given uncertainty over wage growth and factors like the fighting in the Middle East. 

Markets have rethought the three reductions they had been betting on in 2024 as recently as last week. They now fully price just two.

However, Governing Council member Francois Villeroy de Galhau said the ECB should not rule out lowering borrowing costs at both its June and July meetings, pushing back against fellow monetary officials who are uncomfortable at the idea of consecutive cuts.

Mr Villeroy told Germany’s Boersen-Zeitung newspaper that he favours “maximum optionality” after next month’s “done deal” reduction in the deposit rate, which he said can only be derailed by a shock.

“I sometimes read that we should cut rates only once a quarter when new economic projections are available, and hence exclude July,” he said in the interview. “Why so, if we are meeting-by-meeting and data-driven? I don’t say that we should commit already on July, but let us keep our freedom on the timing and pace.” 

Mortgage rates

Meanwhile, tracker mortgage customers are set to get some relief next month as they are directly impacted by ECB rate decisions, but some brokers do not expect reductions will be immediately passed on to all mortgage customers.

Lenders in the retail banking market in the Republic have benefitted from a campaign of interest rate hikes introduced by the ECB but they may come under pressure to offer more attractive rates in the coming months as fresh competition enters the market and customers coming off fixed-rate contracts shop around.

Spanish financial service provider, Bankinter, which operates Avant Money, said it is applying for a full Irish banking licence and entering the deposit market.

Since the start of the year, there has been a frenzy of activity among lenders currently operating in the market to swell their loan books further.

AIB cut mortgage rates on its so-called ‘green’ offering across all its brands including EBS and Haven for customers with more energy-efficient homes while Bank of Ireland tweaked its similar offering.

Meanwhile, PTSB cut its four-year fixed-term mortgages for the second time since last December.

Recent figures from the Central Bank showed interest rates on new mortgage agreements crept up again in March to reach the highest level since 2017, but they may be close to hitting a peak amid changing conditions.

- Reporting by Bloomberg, Reuters and Irish Examiner