FRANKFURT (Reuters)

Growth in negotiated wages across Germany slowed in the second quarter, providing some relief to European Central Bank policymakers and potentially strengthening the case for a rate cut in September.

Negotiated wages rose by 3.1% in the second quarter, down from 6.2% in the previous three months. This suggests that inflationary pressure from labor incomes might continue to ease, according to data from the Bundesbank, Germany’s central bank, released on Tuesday.

The ECB has focused on negotiated wages, arguing that even if current growth rates remain high, collective agreements already made indicate lower figures in the upcoming quarters, helping bring inflation back to 2% by next year.

However, some policymakers may be concerned, as wage growth excluding one-off factors like bonuses and inflation compensation rose to 4.2% in the second quarter, up from 3.0% three months earlier. Monthly figures provided a mixed picture, with the June rate decreasing to 4.1% from 4.7% in May.

Markets currently foresee over a 90% chance of a 25-basis-point rate cut in September. Expectations were reinforced when Finnish central bank chief Olli Rehn mentioned that weak economic growth may justify easing next month.

The Bundesbank cautioned that wage growth remains rapid and that the focus should be on wages without one-offs, as unions are still pushing for significant pay increases. “Wage increases over a twelve-month period were between 4% and 6% in almost all sectors that reached a new collective agreement in the second quarter,” the bank stated in a monthly report. High new agreements are also expected in upcoming negotiations.

ECB chief economist Philip Lane has noted that wage growth around 3% would align with an inflation rate of approximately 2%, indicating that further slowing of income growth may be necessary. He also suggested that a limited period of wage catch-up is warranted, given that workers have lost significant real income to inflation recently.

The ECB predicts growth in compensation per employee to average 4.8% this year and decline to 3.2% by 2026.