(Kitco News) - The European Central Bank is embarking on a new long game as it looks to significantly raise interest rates to bring inflation down to its 2% target.
While a hawkish central bank stance is generally negative for gold prices, the precious metal is managing to hold important support within striking distance of $1,800 an ounce as the ECB's stance is supporting the euro against the U.S. dollar.
Currency analysts note that the policy divergence between the ECB and the Federal Reserve is narrowing. Wednesday, the Federal Reserve raised the Fed Funds rate by 50 basis points and signaled that interest rates will continue to increase through 2023; however, the pace of the rate hikes is expected to slow.
Meanwhile, in Europe, the ECB also raised interest rates by 50 basis points but signaled that this is just the start of its aggressive tightening.
ECB President Christine Lagarde said that the central bank will have to continue to raise interest rates by 50 basis points for the foreseeable future. At the same time, the central bank will start reducing its balance sheet in March.
"It's not a one-shot 50 basis point move," she said in Thursday's press conference. "We have a lot of ground to cover. We are determined to bring inflation down to our 2% target."
Currency analysts note that a lot of the Fed's hawkish positioning is already priced into the market.
"The dollar appetite will likely remain soft, and the rallies will likely be seen as an interesting opportunity to sell the top against other majors, given that the Fed's hawkishness has been wildly priced since mid-2021, and a further downside correction would not be surprising, even though it's somewhat counterintuitive to rush back to majors like the euro, which deals with a terrible energy crisis," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
This shift in global monetary policy expectations is providing a new lifeline for gold Thursday as the market cuts its overnight losses. February gold futures last traded at $1,788.70 an ounce, down 1.65% on the day.
The ECB's aggressively hawkish stance comes as it substantially revised its inflation expectations higher. According to December staff projections, the central bank sees inflation rising 8.4% this year, up from the previous forecast at 8.1%. For 2023, consumer prices are expected to rise 6.3%, up from the September forecast of 5.5%. Inflation in 2024 is expected to rise 3.4%, up from the prior estimate of 2.3%. In the first look for 2025, inflation is expected to rise 2.3%.
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The rise in inflation comes as the central bank also adjusts its growth forecasts. The ECB sees the European economy growing 3.4% this year, up from September's estimate of 3.1%. Eurozone GDP is expected to rise only 0.5% in 2023, down from the previous estimate of 0.9%. The economy is expected to grow 1.9% in 2024, unchanged from the prior estimate; for 2025, GDP is expected to expand 1.8%.
Lagarde said the Central bank expects to see a mild recession next year.
"Growth is nonetheless expected to be subdued next year and has been revised down significantly compared with the previous projections. Beyond the near term, growth is projected to recover as the current headwinds fade," she said in her prepared remarks.
