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ECB will keep tightening as Eurozone economy keeps slowing

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(Kitco News) - Downside risks to the European economy are growing, but with inflation rising to nearly 10% in September, the European Central Bank will continue to raise interest rates.

After raising interest rates by 75 basis points across the board, ECB President Christine Lagarde said that the committee has made process in tightening financial conditions; however, she added that more work needs to be done. "There is still ground to cover," she said.

"In the present state of uncertainty, with the likelihood of recession looming much more on the horizon and the probability of it having increased, everyone has to do their job," Lagarde said. "Our job is price stability. This is our primary mandate and we are riveted to that."

Although interest rates are expected to climb higher through early 2023, Lagarde did not shed any light on how high rates will go or how fast they will get there. She reiterated that future policy rate decisions will continue to be data-dependent and made meeting by meeting.

Rising interest rates come as the ECB continues to see further risks to economic activity through year-end.

"Economic activity in the euro area is likely to have slowed significantly in the third quarter of the year, and we expect a further weakening in the remainder of this year and the beginning of next year. By reducing people's real incomes and pushing up costs for firms, high inflation continues to dampen spending and production. Severe disruptions in the supply of gas have worsened the situation further, and both consumer and business confidence have fallen rapidly, which is also weighing on the economy," Lagarde said in her opening remarks.

"The incoming data confirm that risks to the economic growth outlook are clearly on the downside, especially in the near term," she added.

However, price stability and bringing inflation back down to the ECB's medium-term target of 2% is the central bank's priority.

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Although sharp rises in energy and food prices are the two most significant factors driving inflation, the ECB sees broad-based consumer price increases.

"Inflation remains far too high and will stay above our target for an extended period," said Lagarde. "The risks to the inflation outlook are primarily on the upside. The major risk in the short term is a further rise in retail energy prices. Over the medium term, inflation may turn out to be higher than expected if there are increases in the prices of energy and food commodities and a stronger pass-through to consumer prices, a persistent worsening of the production capacity of the euro area economy, a persistent rise in inflation expectations above our target, or higher than anticipated wage rises."

The gold market has not seen much movement in reaction to Lagarde's latest comments. December gold futures have managed to hold critical support above $1,650 an ounce and are seeing some buying momentum pushing prices to neutral territory. December gold futures last traded at $1,667.70 an ounce, roughly unchanged on the day.

At the same time, the spot gold price against the euro continues to hold modest gains, last trading at € 656.90 an ounce, up 0.36% on the day.

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