(Kitco News) - The gold market is taking a hit following relatively hawkish comments from European Central Bank President Christine Lagarde, who said that the central bank will take incremental baby steps as it looks to normalize its monetary policy.
The ECB left interest rates unchanged on Thursday, in line with expectations, and while it lowered its inflation forecast for this year, Lagarde said that the central bank needs to see further data to be confident before it looks to ease its restrictive policies.
In its monetary policy statement, the central bank wrote that it expects inflation to average 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. The projections for inflation excluding energy and food have also been revised down, and now average 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026.
“We are making good progress and more confident, but we are not sufficiently confident,” Lagarde said. “We will know a little more in April and a lot more in June.”
Closing the door on a potential rate hike in April created some selling pressure in gold against the euro, which has continued throughout the day. Gold was trading at a record high against the euro in the initial reaction to the central bank’s monetary policy statement but has come off those highs following Lagarde’s stance.
Spot gold against the euro is currently trading at $1,972.70 an ounce, roughly unchanged on the day.
Although most inflation pressures have eased in recent months, Lagarde said that wage growth remains a wildcard for the economy.
“Domestic price pressures are still elevated, in part owing to robust wage growth and falling labour productivity. At the same time, there are signs that growth in wages is starting to moderate. In addition, profits are absorbing part of the rising labour costs, which reduces the inflationary effects,” Lagarde said in her opening remarks.
Although Lagarde has struck a slightly hawkish tone, it was not unexpected as many economists see April as an unlikely start to a new easing cycle.
“All told, this meeting reinforces our existing view about the outlook for monetary policy,” said Andrew Kenningham, Chief European Economist at Capital Economics, in a note.
“We think the most likely start date for the ECB to begin interest rate cuts is June, but the probability distribution is heavily skewed towards later.”
“If, for example, services and wage inflation remained close to current levels in the coming months, the ECB would be likely to remain in its current holding pattern,” he added.
