(Bloomberg) -- The European Central Bank’s hope that euro-zone wages rise just enough to fuel economic expansion, without reigniting inflation, will be put to the test by a slow drip of data releases that will determine when interest rates can safely be lowered.

While new quarterly projections to be unveiled at this week’s policy meeting will reveal a slightly softer outlook for prices, the focus of officials is squarely on salaries, which are still advancing at more than double the 2% inflation target.

The concern is such that policymakers insist they must assess pay figures over the next three months before commencing monetary easing — mindful, too, of similar dilemmas faced by counterparts at the Federal Reserve and the Bank of England. 

That means no cut in the deposit rate from its high of 4% is likely before June, and the wait could prove even longer. The fourth quarter saw only a small dip in the growth of negotiated wages. Joerg Kraemer, chief economist at Commerzbank, sees unit labor costs continuing to increase too speedily.

“I don’t believe in a Goldilocks scenario,” he said. “The inflation problem isn’t yet solved.”

Delivering the outcome predicted by the ECB’s forecast would mean returning inflation to target without a deep recession and high unemployment for the 20-nation euro zone. Executive Board member Isabel Schnabel has voiced optimism that this “dream” scenario is within reach, as did Group of 20 officials at a meeting in Sao Paulo last week.

Some indicators are pointing in the right direction. Collective pay growth slowed for the first time since 2022 in the fourth quarter of last year, following a record-high reading in the previous period.

Analysts polled by the ECB also point to pay pressures moderating from 2024, and wage growth dipping below 3% in 2026 – a level that’s generally seen as consistent with the 2% inflation target.

But the picture isn’t clear-cut. Oneoff payments in Germany may push salary growth up again early this year and a new, more forward-looking indicator by the ECB showed a real turning point has yet to be reached.

And with services taking over as the dominant source of consumer-price growth, it could still turn out to be stubborn — meaning monetary policy may have to stay tighter than if the pressure was mainly coming from goods, the Bank for International Settlements said in its quarterly review on Monday. 

Commerzbank’s Kraemer also points to disappointing productivity. As a result, “unit labor costs will continue to rise too quickly to be compatible with the ECB’s 2% inflation target,” he said. “This is probably the reason why, according to recent surveys, more and more firms expect prices to rise again.”

How companies react to wage gains is crucial. While the ECB expects them to absorb some price pressures by taking a hit on profits, Austrian central bank chief Robert Holzmann disagrees, saying inflation will reflect pay rises “sooner or later.”

What Bloomberg Economics Says...

“Bloomberg Economics expects Lagarde to use downward revisions to the forecasts of the ECB’s staff economists after the next meeting on March 6-7 to set the stage for a cut, but she will probably argue that policymakers can’t move until they have more data on wages.”

—David Powell, senior euro-area economist. Read full preview here. 

Such factors help explain why ECB officials are circumspect in discussing loosening. President Christine Lagarde said last week that slower pay growth late last year was “encouraging,” but that later bargaining rounds will be vital in steering rates.

Some reckon the ECB’s vision can become a reality.

“There’s clearly a range of wage growth that would be ‘just right’ in terms of getting inflation back to target,” said Dirk Schumacher, head of European macro research at Natixis. “It’s difficult to say where exactly that range of Goldilocks wage growth is,” but salary increases “wouldn’t necessary have to decline a lot further.”

Data, though, continue to spark concern. While consumer-price gains slowed to 2.6% in February, according to data released Friday, that was more than analysts had estimated. Underlying pressures — excluding food and energy — also overshot.

And the most reliable wage numbers are only available with a long lag. ECB Chief Economist Philip Lane has said the most comprehensive measure from the national accounts arrives with a delay of more than two months. 

Country data, sometimes released more frequently, will still require more time to assess. With uncertainty highest in Germany, monthly figures from the Bundesbank due in late March and late April are “really the place to watch,” Morgan Stanley economists wrote last month.

Waiting for releases like these may be frustrating, but it’s understandable, according to Katherine Neiss, chief European economist at PGIM fixed income.

“I can see why, having gone through this experience of very high inflation, which clearly has been deeply unpopular and affected people’s real incomes, the ECB is going to be cautious,” she said. “I have a lot of sympathy for why the Governing Council will want to see it baked into the data that wages are in fact continuing to come off.”

(Updates with BIS report in 10th paragraph.)

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