FRANKFURT (Reuters) – Strong wage growth is making it harder to bring down inflation in the euro zone, the German central bank said on Monday, calling for a careful approach to further interest rate cuts.
The European Central Bank (ECB) left rates on hold last week but President Christine Lagarde said its next meeting in September was “wide open”, with several policymakers openly considering more cuts as inflationary pressures ease.
The Bundesbank said a strong labour market, coupled with the risk of disruptions to supply, may get in the way of achieving the ECB’s 2% inflation goal.
“Some of the factors supporting the economy are making it more difficult to achieve the inflation targets,” the Bundesbank said in its monthly report.
“The labour markets are still operating at high capacity, wage growth is brisk and prices are rising strongly, particularly in the service sector. Inflationary risks also predominate on the supply side.”
It said services inflation was likely to decline only modestly in the coming months and expected the overall price index to fluctuate around current levels.
“Possible further interest rate cuts should therefore be carefully considered in light of current data,” the Bundesbank concluded.
On the flipside, the Bundesbank noted that German economic output likely grew a little more slowly than expected in the second quarter and that hopes of an imminent industrial rebound had been dampened.
