IG Metall 3% pay deal eases rates pressures

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Germany's largest union accepted a modest annual pay award in a landmark deal yesterday that will allay fears of a surge in European inflation.

IG Metall said it had agreed to a 3 per cent pay rise for 750,000 workers in Germany's biggest state, North Rhine-Westphalia, compared with its original demand for 5.5 per cent for its 3.4 million members.

The deal is likely to set the benchmark for annual pay negotiations across Europe. Analysts said it would reduce pressure on the European Central Bank to raise rates. The euro rose on the news but slipped back as the implications for monetary policy sunk in. One analyst described the deal as "astonishing" and said it cut the odds on a rate hike tomorrow.

The euro was propped up by an unexpected surge in euroland money supply. The M3 - which the ECB targets - leapt to 6.2 per cent last month from January's 5.2 per cent, taking the three-month average to 5.9 per cent, well above the ECB's comfort zone of 4.5 per cent.

Interest rates, now at 3.5 per cent, were last raised by 25 basis points in March. Many economists expect the ECB to raise it as high as 4 per cent.

Stephen Lewis at Monument Derivatives said the news creates a more "fragile" political situation. France and Germany are already at loggerheads, with France wanting a strong euro and Germany happy with the export benefits from a weak currency.