07:23 AM EDT, 08/22/2024 (MT Newswires) -- While economic activity has remained sluggish and forecasts have moved in the right direction, the European Central Bank (ECB) has remained uncomfortable with cutting interest rates while wage growth is elevated, said ING.

Thursday's drop will bring some relief for those looking for a gradual cutting cycle as the 3.6% year-on-year negotiated wage growth in Q2 is more in line with a benign inflation outlook in the medium term, wrote the bank in a note.

The decline in eurozone negotiated wages from 4.7 to 3.6% in the Q2 was more than expected, stated ING.

However, it has to be said that wage growth is still too high for the 2% inflation target given weak productivity growth, pointed out the bank. But forward-looking indicators do still show moderating wage growth over time as more purchasing power is recouped and economic activity is expected to remain moderate. With some productivity pickup to be expected, wage pressures on inflation in the medium term should ease further.

Still, the road to wage moderation could be "bumpy" and the second half of 2024 could still bring some upside surprises as labor unions -- most notably in Germany -- continue high wage demands at the start of negotiations, added ING. While that is great for consumers and would lift the economic outlook somewhat, it could potentially be a curveball for the ECB later in the year.

However, for September, a barrier to another cut seems to have been lifted. ECB President Christine Lagarde already emphasized satisfaction with wage growth expectations and the fact that profits have been absorbing higher wage growth.

With Thursday's numbers showing a drop in wage growth, expectations of a September 25bps cut are growing increasingly firm, according to the bank.