FX.co ★ Eurozone Consumer Pessimism Ebbs, Wage Growth Damp Hopes Of ECB Easing Beyond June Rate Cut

In May, consumer confidence in the euro area reached its highest point since early 2022, bolstered by wage growth figures. These developments suggest the European Central Bank (ECB) might conclude its policy easing with a potential interest rate cut expected in June.

According to preliminary results from the European Commission's monthly survey, the flash consumer confidence index rose for the fourth consecutive month, climbing to -14.3 from -14.7 in April. Economists had anticipated a slightly higher figure of -14.0 for the month. The index for the European Union also increased, rising to -13.2 from -13.7, both reaching their strongest levels since February 2022. Despite this improvement, consumer confidence remains below the long-term average, as noted by the commission.

Data for this survey was collected between May 1 and May 22. Final results for the consumer confidence index, along with the monthly economic sentiment survey data, are scheduled for release on May 30.

An ECB indicator released earlier on Thursday highlighted a 4.7 percent year-on-year increase in negotiated wages during the first quarter, up from the 4.5 percent rise in the previous quarter.

ING economist Bert Colijn observed that the wage growth was unexpected, anticipating moderation. Instead, a catch-up effect in Germany contributed to the increase at the year's beginning. Colijn suggested that this faster-than-expected recovery in purchasing power could boost household consumption and support the eurozone's cautious economic recovery. He remarked that the fast pace of wage growth might intensify discussions among ECB policymakers at their upcoming session in two weeks. While Colijn doesn't expect this to deter a June rate cut, he believes it might solidify a pause in July.

Similarly, Commerzbank economist Marco Wagner asserted that while the new data might not prevent the June rate cut, it could complicate the outlook for future policy easing. Wagner noted, "The latest figures will likely not dissuade the ECB from implementing an initial rate cut in June, particularly given the Governing Council's dovish majority. However, if wage growth remains robust and inflation risks rise, the market's current expectations for further rate cuts, especially for 2025, might prove overly optimistic."