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ECB pushes forward with 50 basis point rate hike and monitoring market tensions

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(Kitco News) - Despite the growing global banking crisis, the European Central Bank is pressing forward with its plan to tighten its monetary policies.

Thursday, in a slightly surprising move, the ECB raised interest rates by 50 basis points across the board. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.00%, 3.25% and 2.50%, respectively, the central bank said.

"The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council's policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission," the ECB said in its monetary policy statement.

While down from Wednesday's highs, spot gold against the euro is still holding on to solid gains in reaction to the ECB's interest rate decision. Spot gold last traded at €1,821.95 an ounce, up 0.51% on the day.

Before the announcement, markets were pricing in a 50/50 chance that the ECB would aggressively raise interest rates; in its monetary policy statement, the ECB downplayed the growing risks in financial markets.

The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, the ECB's policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.

The ECB's focus remains fixed on inflation, which it said is starting to fall even as core inflation embeds itself in the larger economy. In its updated staff projections, the central bank said it expects inflation to average this year at 5.3%. Consumer prices are projected to rise 2.9% in 2024 and 2.1% by 2025.

Core inflation is expected to average this year at 4.6%, rising 2.5% in 2024 and increasing 2.2% in 2025, according to the projections.

At the same time, the ECB has upgraded its economic forecasts as it sees eurozone GPD growing an average of 1% this year. Economic growth is expected to rise 1.6% in 2024 and 2025.

The gold market is holding solid gains against the euro as the single currency struggles against the U.S. dollar. Adam Button, chief currency strategist at said that giving the growing uncertainty markets were looking for a dovish tilt to the comment.

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.