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Grigory Burenkov: "The ECB Will Not Take Risks"

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According to Grigory Burenkov, CEO and Founder of Wheelerson Management Ltd., the European regulator may decide not to lower key rates until it has full information about wage growth in the eurozone.

ECB's Strategy in Tackling Inflation

The European Central Bank, in its fight against inflation, resembles an icebreaker that, despite any obstacles, persistently moves towards its goal.

Grigory Burenkov, CEO and Founder of Wheelerson Management Ltd

Christine Lagarde's team is unanimous in their determination to beat price growth, ignoring the stagnating economy of the eurozone and persistent requests from businesses for cheap credit.

Recently, the ECB reaffirmed its course. For the third time in a row since September 2023 the regulator has left all three key rates at a record high level: the base interest rate at 4.5%, the marginal lending rate at 4.75%, and the deposit rate at 4%. This move, as per the European Central Bank, is anticipated to sustainably lower inflation rates within the eurozone to 2%.

In an attempt to tame price growth, triggered first by the COVID-19 pandemic followed by military actions in Ukraine and a number of other factors, the regulator has raised key rates ten times since July 2022 reaching current record levels by September 2023. Largely thanks to these actions of the ECB, as well as a weakened economy and significantly lower energy prices, inflation in the eurozone fell from 10.6% at the end of 2022 to 2.3% in November 2023.

ECB President Christine Lagarde announced at the final press conference that the decision to keep rates at the same level was unanimous. And any discussions about their reduction, however preliminary, are premature. According to Lagarde, the ECB needs time to ensure that inflation is indeed consistently decreasing. The regulator's decision will be made based exclusively on the analysis of economic data, without any attachment to dates. The ECB has indicated its readiness to keep key rates unchanged, thus restricting businesses’ access to low cost borrowing, for as long as necessary to tame inflation.

Grigory Burenkov Comments on ECB's Decisions

According to Grigory Burenkov, the ECB's decision to maintain rates was more than predictable: "Almost all analysts predicted the continuation of the ECB's restrictive policy. I agree with the statement that at the moment the fight against inflation is more important for the regulator than the problems of stagnation in the economy. The ECB does not deny that its measures hinder the recovery of business activity in the eurozone. But at the same time, it is obvious - the regulator expects the economy to recover as inflation decreases."

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"On the question of when the ECB will decide to lower rates, there is no definitive answer," says Grigory Burenkov. "The overwhelming majority of economic institutions and analysts focus on two dates. The optimistic one - the ECB will lower the base rate in April and the conservative one - June 2023. In my opinion, the regulator will be extremely cautious in its actions and will not take risks on such a painful issue."

Lagarde's Outlook on Inflation Trends

Indeed, Christine Lagarde spoke very cautiously about this. The head of the ECB called for vigilance, noting there was a possibility that inflation could rise again in the short term. This already happened in December 2023, when prices unexpectedly rose to 2.9%. Mrs. Lagarde noted that such spike was expected and does not indicate that measures to reduce inflation are ineffective. However, according to some experts, this sharp jump was one of the reasons for the ECB's caution in keeping the rates unchanged.

Among the factors that could lead to inflation growth, according to Christine Lagarde, could be the increase of geopolitical tensions in the Middle East. Indeed, in this case, further increases in energy prices and cost of cargo would be almost inevitable directly affecting the already suffering eurozone economy.

Christine Lagarde also expressed concerns that the trend towards inflation reduction in 2024 could be undermined by wage growth. At the same time, the head of the ECB expressed hope that corporate profits could neutralize the negative effect of increasing employees' incomes.

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