There has been some hope that the European Central Bank (ECB) might start to reduce interest rates before the summer, but a couple of factors are leading to doubts about that.

This would mean a longer period of higher interest rate costs for both consumers and companies.

On Friday 23 February, the ECB released a survey which showed that inflation expectations among euro zone consumers actually rose of the year ahead, hitting 3.3%.

While this number is well below some of the inflation rates we have seen in recent years, it is still well above the central bank’s target of 2%.

The ECB will need evidence that both inflation rates and expectations for future inflation rates are moving closer to its target before any interest rate is considered.


Beyond ECB projections, there are also increasing signs that inflation is not going to fall quickly from here.

Labour costs also continue to be a major headwind for companies, with the increase in the minimum wage in Ireland - and likely further pay rises expected across the euro zone - meaning that companies will have to increase prices to meet the extra costs.

Those price increases themselves will become part of the inflation picture this year, again keeping the headline rate higher.

In agriculture, the effects of higher input costs are still being felt. A Teagasc report published this week looking at the horticulture sector described the rise in labour costs as the “standout issue” which is a “key driver in overall input price inflation”.


The worry for the ECB - and for borrowers who are relying on the central bank to cut rates to reduce the costs of loans - is that increasing labour costs are not like energy costs. The price of energy inputs such as oil, gas and electricity can fluctuate wildly over the course of a year – as we all saw in the wake of the Russian invasion of Ukraine.

However, though labour costs increase more slowly, they tend to never fall. This means that rising labour costs have a longer-term effect on inflation than energy costs.

The permanent rise in labour costs can lead to a permanent rise in the cost of goods and services as companies need to cover their increased wage bill.

However, where increasing wages are an economy-wide phenomenon, then the price of everything goes up, which in turn leads to workers demanding more wages as their cost of living increase, leading to a repeat of the cycle.

Economists call this a wage-price spiral, which can hold inflation at a much higher level over a long period of time and, in extreme cases, can lead to very rapid inflation.

Ireland and the euro zone are not at this scenario yet, but concern that the region is at risk of it may mean a significant delay in the first ECB rate cut.