Grigory Burenkov, founder of Wheelerson Management Ltd and owner of Osome Group, discusses the European Central Bank’s recent policy changes and anticipates additional rate cuts over the coming year.
Just over a month ago, the ECB announced a reduction in the base interest rate from 4.5% to 4.25% per annum. This decision marked a turning point in the eurozone’s monetary policy after a prolonged period of tightening driven by unprecedented inflation spikes. The world, without exaggeration, closely followed the ECB’s actions, awaiting signals of policy easing, which have now materialised.
As an experienced financial analyst, Grigory Burenkov points out that this signifies a shift to a new phase in the eurozone’s economic policy under Christine Lagarde‘s leadership, emphasizing the need to stimulate economic growth.
Reasons and Prerequisites
In 2022-2023, the European Central Bank, along with other regulators, had to significantly tighten monetary policy due to a sharp increase in global inflation. This price surge resulted from a combination of factors: the aftermath of the COVID-19 pandemic, the need to revive economic activity post-lockdowns, and the energy crisis triggered by the conflict in Ukraine. Although raising key rates helped to some extent in curbing inflationary pressure, it also increased loan costs, affecting the economies of all EU countries.
“The energy crisis was a real test for the European economy,” notes Grigory Burenkov. “It not only fueled inflation but also threatened the competitiveness of European industry. The ECB had to act decisively to prevent an inflationary spiral.”
Burenkov’s view aligns with Bloomberg analysts, who assert that only decisive ECB actions could support the EU’s economy. The ECB began tightening monetary policy in summer 2022, ending a prolonged period of ultra-low interest rates. Prior to this, the ECB’s base rate had been at zero for six years. However, rising inflationary pressures (with price growth reaching double digits in some EU countries) forced the regulator to take decisive measures. Following a series of hikes, by autumn 2023, the ECB’s key rate reached a historic high of 4.5%.
It is worth noting that the ECB’s actions were less severe compared to some other central banks, such as the US Federal Reserve.
[Grigory Burenkov, Cypriot financier and founder of Wheelerson Management Ltd and owner of Osome Group, anticipates potential further rate cuts by the ECB within the year.]
New Challenges in a New Phase
Now, with inflationary pressure easing and the economy needing stimulation, the ECB has moved to ease policy. “The prospects for slowing price growth have significantly improved,” said ECB President Christine Lagarde, commenting on the rate cut.
“The ECB is balancing,” says Cypriot financier Grigory Burenkov. “On one hand, it needs to consolidate gains in the fight against inflation; on the other, it must give the economy the necessary impetus for growth. This requires a fine-tuned monetary policy.”
Despite some improvements, the economic situation in the eurozone remains challenging. By spring 2024, price growth rates have been significantly reduced, approaching the ECB’s target. However, according to Christine Lagarde, it is premature to declare the inflation problem fully resolved. She warned that in the medium term, price growth might exceed the desired level. Additionally, the eurozone economy still faces several challenges, including international political instability and the worsening effects of climate change, which could impact price dynamics and overall economic growth.
Impact on the Economy and Financial Markets
Lowering interest rates aims to stimulate the economy by making loans more affordable for individuals and companies. This is crucial for the eurozone, as its economy still struggles with the effects of previous high-rate policies.
Economic indicators remain weak – GDP growth in the first quarter barely reached 0.3% after a prolonged stagnation period. Industrial production continues to decline, and interest in business development and real estate loans has significantly decreased. In this context, easing monetary policy could be a key factor in stimulating growth and investment in the region. “Lowering rates could be a catalyst for reviving economic activity in the eurozone,” believes Burenkov. “However, it is important to understand that the effects of this decision will not be immediate. It will take time for lower rates to translate into real investments and consumer spending.” Additionally, the rate cut is expected to increase demand for riskier assets and lower bond yields.
Global Context
Although the ECB emphasises independence in decision-making, it cannot completely disregard the actions of other central banks, such as the US Federal Reserve. This is because the Fed’s policies significantly impact global financial conditions and currency exchange rates, which in turn affect the eurozone economy. “In the modern financial world, the ECB’s actions have global consequences,” emphasises Grigory Burenkov. “By outpacing the Fed and the Bank of England in lowering rates, the ECB not only stimulates the European economy but also influences global capital flows and currency exchange rates.” Indeed, the ECB was the first major regulator to start cutting rates after the global inflation shock. This could weaken the euro against other major currencies, potentially enhancing the competitiveness of European exports. However, it might also increase the cost of imports, adding inflationary pressure.
Looking Ahead
What lies ahead for the eurozone? Experts we surveyed expect the ECB to continue gradually lowering rates. “We are likely to see a few more rate cuts this year, but the ECB will proceed with extreme caution,” predicts Grigory Burenkov, founder of Wheelerson Management Ltd and owner of Osome Group. “The key challenge is to avoid a resurgence of inflation while stimulating economic growth. As I mentioned, this will require fine-tuning monetary policy and continuous monitoring of economic indicators.” Analysts also forecast that the European Central Bank will act cautiously, likely reducing the rate by no more than 0.25 percentage points per quarter. Such a moderate policy is expected to continue throughout the year.
Grigory Burenkov is a financial analyst from Cyprus, founder of Wheelerson Management Ltd, and owner of Osome Group.
