Leaviss: Will wage spiral provoke ECB into rate hike?

WILL ECB HIKE RATES?

Jim Leaviss, head of retail fixed interest at M&G, looks at how the threat of high wage settlements in Europe could force its central bank to raise interest rates.

With the European Central Bank warning the inflation outlook "could move to the upside", and hinting rates could rise despite the fragility in peripheral Europe, any sign of inflation-busting wage hikes would have been a big red flag for government bond markets. IG Metall, the German metalworkers union, had demanded a 6% wage rise at the end of last year. Today, IG Metall and Volkswagen announced they had agreed a settlement for 100,000 car workers worth somewhere between 3% and 3.5%. This is obviously above the 2% ECB inflation target, and above the actual 2% German inflation rate, ...