The European Central Bank is set to leave its key interest rate at a record-high 4 percent on Thursday, as concerns over wage growth temper the urge to give more support to the economy.

At the Governing Council's last meeting in March, ECB President Christine Lagarde had indicated that the bank could start easing policy in June, and analysts say nothing material has happened to change that in the interim.

Headline inflation continued its downward drift in March, equaling a two-and-a-half year low of 2.4 percent, thanks largely to food and energy prices, but services price inflation — heavily influenced by local wage developments — remained stubbornly high at 4 percent. With survey data suggesting the economy has bottomed out in the near term, and with unemployment still near a record low, that all signals another month of wait-and-see.

But the direction of travel remains the same, analysts say.

Gilles Moëc, chief economist with AXA Investment Management, said it's increasingly likely that wage growth will slow to a level that reassures the ECB it can cut without fear of reviving inflation.

“There already was a deceleration in negotiated wages in Q4 2023 in the Euro area,” he argued in a note on Tuesday. “A recent Banque de France survey signals a deceleration in wages in France, and imperfect but still helpful real time indicators such as the Indeed tracker point to more slowdown in early 2024 at the euro area level.”

The bank will also have to contend with the dangers of keeping policy too tight for too long. On Tuesday, the ECB’s quarterly bank lending survey, a forward-looking release to which it attaches great importance, showed corporate credit demand fell surprisingly in the first quarter, disappointing hopes for a pickup in investment later this year.

In a speech last month, recently-appointed ECB board member Piero Cipollone warned that “output and productivity growth are unlikely to be sustained over time if wages and domestic demand remain permanently depressed.” 

Carsten Brzeski, global head of macro at ING, said the survey offset the “rather encouraging green shoots of recent days” and was another reason for the ECB to begin cutting rates in June.

The survey highlighted the gap in economic performance between Europe and the U.S., where activity has consistently defied fears of a slowdown. At the start of the year financial markets had expected a rapid easing cycle on both sides of the Atlantic, but strong economic data and recent communication from the Federal Reserve has led markets to abandon that belief. The weakness of the eurozone economy, by contrast, has kept the repricing of ECB expectations relatively modest.

Concerns over the state of the bloc’s economy, and its competitiveness vis-a-vis the U.S. and China, have become a dominant theme at the EU level. Heads of government will meet April 17-18 and are set to call for a sharper focus on restoring competitiveness, drawing on an in-depth report by former Italian Prime Minister Enrico Letta on the future of the single market.

It’s not all doom and gloom, however. On Monday, Germany — the region's industrial heartland — posted its first back-to-back increases in output in nearly a year. Business confidence, both in Germany and further afield, is at its highest in a year, and falling inflation means that the pay rises people get are now going further.

And while rising commodity prices may complicate the picture somewhat, prices for natural gas have halved since November and are still bumping along near their lowest since the invasion of Ukraine two years ago.

That leaves the bank largely free to concentrate on managing expectations for what is likely to be a gentle easing process.

While a first cut in June is seen as all but certain, the pace and scale of cuts beyond that meeting are still uncertain, and will sharpen the focus on Lagarde's commentary at her usual press conference.

“If wage growth continues to come down in the first quarter, the ECB will be fine,” said ING's Brzeski.