(Kitco News) - The European Central Bank has become the second G7 nation to cut interest rates; however, investors should not expect that this is the start of a new easing cycle, which is not providing any new bullish momentum for gold.
After cutting interest rates by 25 basis points, the first move since rates peaked in September, ECB President Christine Lagarde explicitly stated that the central bank remains focused on bringing inflation down to its 2% target.
“Let there be no doubt in our commitment to tame inflation,” she said in a press conference following the ECB’s monetary policy decision.
Lagarde added that while the central bank expects inflation pressures to continue easing, the committee needs to see more data to be confident about further rate cuts.
The ECB has cut rates even as inflation has remained stubbornly elevated. According to updated staff projections, headline inflation is expected to rise 2.5% this year, 2.2% in 2025, and 1.9% in 2026. Inflation expectations for this year and next are slightly above March’s projections.
Europe’s stubborn inflation persists as the region’s economy remains sluggish. Staff projections see the eurozone economy growing 0.9% this year, 1.4% in 2025, and 1.6% in 2026.
Although the ECB is hesitant to signal further rate cuts this year, Lagarde admitted that interest rates are still restrictive and well above the neutral rate. However, she reiterated that the committee will not pre-commit to any decision.
“We need more data to confirm we are on this disinflation path. We know the path we are on,” she said. “But we don’t know the speed that we are traveling or how long it will take.”
The ECB’s relatively neutral forward guidance has provided little momentum for the gold market. Spot gold against the euro continues to consolidate at elevated levels, last trading at €2,181 an ounce, up 0.68% on the day. Gold against the euro is moving roughly in line with the broader market; spot gold against the U.S. dollar last traded at $2,375 an ounce, up 0.80%
Andrew Kenningham, Chief European economist at Capital Economics, said in a note that he viewed the comments in the ECB’s monetary policy statement as slightly hawkish and Lagarde’s comments as slightly dovish, as she downplayed some inflation threats, like rising wages in the first quarter.
Kenninghamsaid that while the ECB sees more rate cuts down the road, the committee is still in no hurry.
“We now think the ECB is most likely to cut rates twice more this year, in September and December, bringing the deposit rate to 3.25%,” he said.
In an interview with Kitco News, Axel Merk, President and Chief Investment Officer at Merk Investments, said overall long-term interest rates will be higher as inflation remains sticky; however, he added that historically, when central banks start to cut rates, a slowing economy forces them to go beyond initial expectations.
He added that he has little faith in official forecasts.
Lagarde: "Despite the progress, inflation pressures remain strong...inflation outlook has been projected upward"
-- yet ECB cut rates. sure, makes perfect sense.— Axel Merk (@AxelMerk) June 6, 2024
