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Gold sees little reaction as ECB raises interest rates by 25 basis points
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(Kitco News) - In a somewhat unexpected move, the European Central Bank has raised interest rates across the board by 25 basis points as it says that inflation is expected to remain too high for too long.
The ECB said that it would increase the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility to 4.50%, 4.75% and 4.00% respectively, with effect from 20 September 2023.
According to consensus forecasts, economists were expecting to leave interest rates unchanged; however expectations started to shift early Wednesday morning.
The gold market is not seeing much reaction to the ECB’s latest monetary policy decision. Spot gold against the euro last traded at €1,782.44 an ounce, up 0.24% on the day. In comparison, spot gold against the euro is roughly unchanged on the day, last traded at $1,908.60 an ounce.
The central bank’s latest tightening comes as it lowers it growth forecasts and increases its inflation expectations.
“The September ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025,” the ECB said in its monetary policy statement.
“With the increasing impact of this tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025,” the ECB added.
Although the ECB raised interest rates, analysts note that the impact has been muted as this is expected to be the last hike in this tightening cycle.
“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the central bank said in its statement.
Although European interest rates are expected to be higher for longer, ECB president Christine Lagarde provided little guidance on how long this period might last.
She said that the committee will be data-dependent but remains committed to bringing inflation down to its medium-term 2% target.
Although stagflation risks have increased in Europe, Lagarde said that the ECB is confident that growth will still pick up late in the third quarter of 2024.
