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Gold price largely ignores BoE rate hike as central bank downplays inflation threat

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(Kitco News) -The gold market continues to hold relatively stable ground above $2,000 an ounce as the Bank of England continues to raise interest rates in an attempt to fight the nation's significant inflation threat.

As expected, the BoE raised interest in the Bank Rate by 25 basis points to 4.50%. However, the central bank provided little forward guidance as it continues to downplay inflation holding above 10%.

However, the central bank did admit that inflation would fall slower than initially expected.

"CPI inflation is expected to fall sharply from April, in part as large rises in the price level one year ago drop out of the annual comparison. In addition, the extension in the Spring Budget of the Energy Price Guarantee and declines in wholesale energy prices will both lower the contribution from household energy bills to CPI inflation. However, food price inflation is likely to fall back more slowly than previously expected. Alongside news in other goods prices, this explains why the Committee's modal expectation for CPI inflation now falls back more slowly than in the February Report," the central bank said in its latest monetary policy statement.

The central bank did note that if inflation pressures persisted, then further tightening in monetary policy would be required.

Last month, the nation's consumer prices index (CPI) measure of inflation fell only slightly, to 10.1% in March from 10.4% in February. It was expected to fall to 9.8 percent. Inflation has held above 10% for the last seven consecutive months.

Taking a long-term view, the bank said that it expects inflation to fall to 1% in the next two to three years.

"In the MPC's latest modal projection conditioned on market interest rates, CPI inflation declines to a little above 1% at the two and three-year horizons, materially below the 2% target. This reflects the emergence of an increasing degree of economic slack and declining external pressures that are expected to reduce CPI inflation," the central bank said.

The latest central bank decision is not having much impact on financial markets as markets continue to expect that British interest rates will top out around 5.00% this year.

June gold futures last traded at $2,037.50 an ounce, fairly unchanged on the day. At the same time, gold against the British pound is not seeing any significant gains as it remains fairly elevated. Spot gold last traded at $1,611.44 an ounce, up 0.22% on the day.

Looking at economic activity, the BoE is slightly more optimistic on growth for 2023, compared to earlier in the year, adding that activity has been material stronger than expected.

"The improved outlook reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labor market leads to lower precautionary saving by households," the central bank said.

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