Make Kitco Your Homepage

ECB in no hurry to raise rates even as inflation risks rise

Kitco News

Editor's Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today's must-read news and expert opinions. Sign up here!

(Kitco News) - Inflation pressures have risen, but the European Central Bank is reluctant to increase the speed of its normalization process.

Following its monetary policy meeting, ECB President Christine Lagarde struck a firm tone that the central bank will maintain a level of flexibility as Russia's invasion of Ukraine has significantly impacted the region's economic activity.

"Flexibility has served us well in the last two years," she said. "We have a sequence that we will continue to follow."

The comments come as the ECB left interest rates unchanged and reiterated its plan to end its asset purchase programme sometime in the third quarter.

The comments come as Europe continues to feel the effects of Russia's war with Ukraine.

"The conflict and the associated uncertainty are weighing heavily on the confidence of businesses and consumers. Trade disruptions are leading to new shortages of materials and inputs. Surging energy and commodity prices are reducing demand and holding back production. How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures," Lagarde said in her open statement. "In the current conditions of high uncertainty, we will maintain optionality, gradualism and flexibility in the conduct of monetary policy."

Lagarde said that the ECB is waiting for updated staff projections to be released in June to decide if the pace of normalization needs to increase. However, it appears that the central bank is not ready to raise monetary policy anytime soon.

Lagarde said the ECB's sequence is to complete its asset purchases before looking at rate hikes. She added that potential rate hikes will come "sometime"  after purchases end, which could mean weeks or months.

Elon Musk launches $43 billion hostile bid for Twitter; promising to unleash its full potential

"We will deal with interest rates when we get there," she said.

Although the central bank is waiting for its updated projections, it noted that downside risks for the economy have risen significantly.

"While risks relating to the pandemic have declined, the war may have an even stronger effect on economic sentiment and could further worsen supply-side constraints," Lagarde said.

At the same time, inflation, which rose 7.5% last month, could continue to push higher. Lagarde warned that rising consumer prices have become widespread.

"The risks to the medium-term inflation outlook include above-target moves in inflation expectations, higher than anticipated wage rises and a durable worsening of supply-side conditions," she said.

The latest comments from the ECB are having little impact on gold prices. The precious metal is seeing some technical selling pressure after rising to a fresh four-week high of around $1,981. Spot gold last traded at $1,969 an ounce, down 0.49% on the day.

Some economists note a significant divide in monetary policies between the Federal Reserve and the ECB. While the ECB is maintaining its current normalization pace, the Federal Reserve is planning to aggressively tighten its monetary policy.

The U.S. central bank has signaled that it could raise interest rates by 50 basis points at the next two meetings. The Federal Reserve also plans to start reducing its balance sheet in May.

Some analysts have said that while geopolitical uncertainty continues to support gold, diverging monetary policy does present some headwinds. Analysts said that an aggressive Federal Reserve supports the U.S. dollar and higher U.S. bond yields.  

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.