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Gold price rises as ECB sees 8.7% decline in European economy in 2020

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(Kitco News) - The gold market is seeing renewed upward momentum Thursday after the European Central Bank increased its stimulus measures with the COVID-19 pandemic expected to significantly impact European growth.

Following its monetary policy meeting, the ECB said that it was increasing its emergency spending program by €600 billion to a total of €1,350 billion. The move comes as the ECB sees economic growth falling 8.7% this year, according to its latest economic projections.

“Incoming information confirms that the euro area economy is experiencing an unprecedented contraction,” said ECB President Christine Lagarde in her opening statement. “While survey data and real-time indicators for economic activity have shown some signs of a bottoming out alongside the gradual easing of the containment measures, the improvement has so far been tepid compared with the speed at which the indicators plummeted in the preceding two months.”

During the question and answer portion of her press conference, Lagarde said that the ECB’s emergency program appears to be working as financial conditions have eased compared to the start of the pandemic-induced economic crisis.

Looking at the ECB projections, following this year’s sharp contraction, the central bank sees euro-zone growth rebounding by 5.2% in 2021 and by 3.3% in 2022.

Looking at inflation pressures, the ECB sees consumer prices falling to 0.3% this year and remaining subdued through the next two years. Inflation pressures are expected to rise 0.8% in 2021 and push to 1.3% by 2022.

Although the ECB is optimist that the European economy can see a significant recovery in 2021, Largarde noted that there remains a high degree of uncertainty.

“In general, the extent of the contraction and the recovery will depend crucially on the duration and the effectiveness of the containment measures, the success of policies to mitigate the adverse impact on incomes and employment, and the extent to which supply capacity and domestic demand are permanently affected,” she said. “Overall, the Governing Council sees the balance of risks around the baseline projection to the downside.”

In light of the latest dire economic projections, the ECB’s commitment to provide ample liquidity to financial markets is helping to push gold prices higher Thursday. August gold futures last traded at $1,720 an ounce, up nearly 1% on the day.

Although short-term deflation risks are rising, commodity analysts have noted that unprecedented monetary policy stimulus measures will ultimately push inflation higher, which will keep real interest rates low, benefiting gold prices.

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