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Gold price struggles as ECB's Lagarde attempts to talk down bond yields

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(Kitco News) - The gold market is losing some ground even as the European Central Bank (ECB) tries to talk down the sharp rise in bond yields, saying that it will frontload the asset purchases of its pandemic emergency purchase programme (PEPP).

ECB President Christine Lagarde noted in her opening remains that rising interest rates pose a risk to broader financing conditions.

"If sizeable and persistent, increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy," she said in her opening remarks. "This is undesirable at a time when preserving favorable financing conditions still remains necessary to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability."

Because of the shifting market conditions, the ECB announced Thursday that it would "significantly" increase the pace of its asset purchases in the second quarter of 2021.

"We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation," Lagarde said.

Gold prices aren't seeing much of a reaction to the ECB's attempt to talk down bond yields. The market has been creeping lower throughout Lagarde's press conference. April gold futures last traded at $1,720.40 an ounce, relatively unchanged on the day.

The ECB's new focus on bond yields and tightening market conditions comes as optimism builds for a faster than expected economic recovery in the Eurozone.

The latest ECB staff projections show that the central bank expects the European economy to grow 4.0% this year, up from December's growth forecast of 3.9%. Economic growth is expected to increase 4.1% in 2022, down one tick from December's projection of 4.2%. The economy is expected to expand 2.1% in 2023, unchanged from December's forecast.

While the ECB expects to see a robust economic recovery this year, Lagarde said that the pickup in activity is not likely to come until the second half of the year. She added that the recovery depends on the path of the COVID-19 pandemic and the rollout of vaccines.

"Overall, the risks surrounding the euro area growth outlook over the medium term have become more balanced, although downside risks remain in the near term," she said. "On the one hand, better prospects for global demand, bolstered by the sizeable fiscal stimulus, and the progress in vaccination campaigns are encouraging. On the other hand, the ongoing pandemic, including the spread of virus mutations, and its implications for economic and financial conditions continue to be sources of downside risk."

Although the ECB's growth forecasts are relatively unchanged, the central bank has significantly increased in inflation forecast, even as prices are expected to remain below its 2% target.

Looking at ECB staff macroeconomic projections for the Eurozone, annual inflation is forecasted to rise to 1.5% in 2021, up from December's forecast of 1%. Inflation is expected to rise by 1.2% in 2022, up from the previous estimate of 1.1%. By 2023 inflation is expected to rise by 1.4%, unchanged from the previous forecast.

"The outlook for inflation has been revised up for 2021 and 2022, largely due to temporary factors and higher energy price inflation," said Lagarde.

"It is possible that inflation hits 2%, but we will look through that because of technical and temporary conditions," Lagarde added in the question and answer period of her press conference.

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