Tariffs Trumped Data
There’s been no shortage of Euro area news over the past week, with the net effect being deeper rate cut expectations for the ECB. On the hawkish side, there was confirmation of strong price inflation with persistently excessive negotiated wages, resilient ESIs, and ECB comments about cuts potentially being delayed and limited by proximity to a neutral setting. But US tariff threats and growth concerns spilled over to dominate ECB pricing, which seems excessive.
The final Euro area inflation print for January confirmed the headline rise to 2.52%, 0.1pp above flash forecasts and 0.4pp above the consensus prevailing in December. Median inflation rates were at least more subdued than in the UK, but our persistence-weighted and latent trend estimates remain awkwardly high amid rapid wage growth. Inflation should slow with French energy prices in February. Unfortunately, it seems set to stick above the target in 2025, discouraging ECB cuts from matching market pricing (see EA Inflation Excess Persists In 2025).
Negotiated wages grew by 4.1% in Q4, slowing sharply from Q3, but little changed on the average from 2024 and 2023. It is not yet on an obvious path of improvement. Broader labour costs have also slowed and are suggesting unit labour cost growth of around 4% y-o-y, although that would mark an abrupt rise in the quarterly pace. Labour costs are growing too fast to be consistent with a sustainable return to the ECB’s inflation target (see Euro Area Wage Growth Is Too Hot).
Crashing US surveys in 2025 have looked idiosyncratic, as spurious exaggeration of exceptionalism ends. The ESI corroborates the PMI’s resilience in the euro area. Price expectations have been trending further above long-run averages without a one-off shock, suggesting European policy is too loose for this stage of the economic cycle. EA unemployment remains lower than a year ago, inconsistent with tight monetary conditions. We still see the ECB’s last cut in June, much sooner than the market prices (see EA Resilience Is Perfunctory Problem).
The account of the ECB’s January meeting emphasised an expected moderation in wage pressures, but that upside risks, including geopolitical uncertainty and trade disruptions, could delay further easing. Some Governing Council members also noted that rates are approaching neutral territory, limiting room for cuts. Similar structural constraints were highlighted alongside Thailand’s surprise rate cut, damping its dovish message, while the cut in Korea was as expected. The ECB remains highly likely to cut by another 25bp at its 6 March meeting, alongside updated staff forecasts. We expect it to repeat warnings that the pace of cuts may need to slow, discouraging calls for April.