(Kitco News) - The gold market is not seeing much reaction in global currency markets as the European Central Bank cuts interest rates by 25 basis points across the board.
In a much-anticipated move, the ECB said the interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility will be decreased to 4.25%, 4.50%, and 3.75%, respectively, with effect from 12 June 2024.
The gold market is seeing only some modest buying momentum in its initial reaction to the interest rate cut. Spot gold against the euro last traded at €2,168.44 an ounce, up 0.14% on the day.
The ECB noted that its rate cut comes as inflation has fallen by more than 2.5 percentage points since September 2023, adding that the inflation outlook has “improved markedly.”
“Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady,” the central bank said in its monetary policy statement.
While easing inflation pressures have allowed the ECB to loosen its monetary policy, some analysts have said that Thursday’s cut was necessary as the region’s economy has weakened since the start of the year.
In a recent interview with Kitco News, Nitesh Shah, Head of Research at WisdomTree, said that the ECB is a little late to the game, which could lead to aggressive easing as it tries to catch up to support economic activity.
In its updated economic projections, the ECB sees the eurozone economy growing 0.9% this year, 1.4% in 2025 and 1.6% in 2026.
The rate cut also comes as the ECB sees inflation stubbornly elevated. Headline inflation is expected to rise 2.5% this year, 2.2% in 2025 and 1.9% in 2026.
“The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections,” the central bank said in its statement.
Although the ECB has started to ease interest rates, it remains reluctant to signal the start of a new easing cycle.
“The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path,” the statement said.
Michael Brown, Senior Research Strategist at Pepperstone, said that the muted market reaction to the cut is not surprising as the move has been well-telegraphed since March.
Although he is expecting to see two more cuts this year, in September and December, Brown said that risks are tilted to the hawkish side.
“Policymakers are clearly attempting to give themselves as much flexibility as possible,” he said.
The ECB has become the second of the Group of Seven central banks to cut interest rates. On Wednesday, the Bank of Canada cut its overnight rate by 25 basis points and signaled more rate cuts to come this year.
