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Fading Wage Boom Gives Respite to Europe’s Biggest Rate Hawks

Michal Vyprachticky is relieved that the three years of double-digit salary hikes that squeezed his Czech metalwork company’s profits may be behind him, for now.

As booming economic growth fueled demand for the steel doors and staircases his factory makes, a labor shortage made it impossible for him to find people to run the shop’s lasers and presses. Raising the pay of his best welders by more than half, to about $10 an hour, the 40-year-old engineer joined a trend that helped drive up the cost of everything from housing to food and trigger Europe’s fastest rise in interest rates.

“We couldn’t even find cleaning staff,” said Vyprachticky, whose eponymous factory in Humburky, 100 kilometers (60 miles) east of Prague, has 55 employees. “Everyone was trying to hire people at the same time and was raising wages. We had no other choice than to do that too.”

Vyprachticky’s story echoes that of businesses big and small in the Czech Republic, where a tight jobs market pushed unemployment to the lowest in the European Union and emboldened workers to demand more cash. Now there are signs the red-hot job market is cooling. While that’s good news for employers, it’s also providing an argument for Europe’s most hawkish central bank to put a pause on a rate-tightening cycle that has seen it diverge from a dovish tilt among its bigger global peers.

As the wage hikes prompted Czechs to splurge, inflation accelerated toward the top of the central bank’s 1%-3% target band. Policy makers raised borrowing costs a record eight times over the past two years, with the last hike, in May, coming even as the European Central Bank delayed its exit from euro-area stimulus and the U.S. Federal Reserve stepped back from further tightening.

Some Czech board members still see domestic inflation pressures strong enough to warrant higher rates. But this month Governor Jiri Rusnok stuck by the central bank’s forecast, which implies borrowing costs staying put for about a year. Economists think the bank will probably keep its two-week benchmark at 2% at a policy meeting on Wednesday.

While the Czech Republic is exposed to slowdown abroad, for now, household consumption, government spending and investment have replaced exports as the driver of the $240 billion economy, helping keep growth above levels in the euro area, the country’s main trading partner.

That’s a benefit because, according to central bank board member Tomas Holub, manufacturing is showing the impact of weaker foreign demand.

“Wage growth in this segment has already peaked and is beginning to ease to levels that could be more sustainable for companies,” Holub said on June 4.

While first-quarter data still showed a 7.4% annual increase in nominal wages, the rise was driven mainly by a one-off increase in public-sector salaries, with pay hikes in private businesses coming in at a weaker pace.

That bodes well for large multinational companies, as well as small businesses like Vyprachticky’s. He said it’s become easier to find workers if he needs them.

“The situation is much better now,” he said. “I’d say the pressure to raise salaries won’t be as strong as it was.”
Source: Bloomberg

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