ECB most concerned about wages, services, Schnabel says

FRANKFURT (Reuters) - The final stage of getting euro zone inflation back to 2% will be bumpy and an erosion in productivity, along with high services costs, pose some of the biggest risks, European Central Bank board member Isabel Schnabel said on Thursday.

Euro zone inflation has fallen more quickly in recent months than many had expected, but the ECB now fears that price growth could oscillate over the next few months, including the possibility of some significant temporary upticks.

"There is a consensus emerging that we may be facing a quite bumpy last mile," she told a conference. "The biggest concern is clearly services inflation."

Services inflation has been stuck at 4% all year, partly on robust nominal income growth and an abundance of household savings that buffered disposable income even during rapid inflation.

The ECB has put a special focus on wages and said that a rate cut in June could only come after first quarter data confirm that the growth in labour costs is moderating.

"One aspect that we are looking at very vigilantly is the development of unit labour cost," Schnabel said. "Wage growth remains relatively strong but it seems to be gradually easing in line with what we have in our projections."

The ECB has all but promised a June 6 policy easing but has kept its options open for subsequent months, and markets have priced out more than a full rate cut, primarily due to reduced easing expectations from the U.S. Federal Reserve.

Investors now expect just 68 basis points of rate cuts this year, down from well over 100 basis points seen two months ago.

But Schnabel also noted that the euro zone was also not yet in the clear.

"The more concerning part is productivity growth," she said. "We've had negative productivity growth now over several quarters."

Productivity fell sharply in recent years, but some argue that was mostly because firms were hoarding labour during the downturn, so a rebound in growth will improve productivity.

However, an erosion in productivity normally generates inflationary pressures, so others remain concerned that corporate margins are unlikely to absorb all wage growth and prices will keep on rising.

(Reporting by Balazs Koranyi; Editing by Alison Williams and Gerry Doyle)