(Kitco News) - The gold market is losing some ground to the euro after the European Central Bank cuts rates and signals that inflation is settling around its long-term target of 2%.
In a much-anticipated move, the ECB cut its three key interest rates by 25 basis points. The central bank said the interest rates on the deposit facility, the main refinancing operations, and the marginal lending facility will decrease to 3.00%, 3.15%, and 3.40%, respectively.
Although the move was priced in, some market participants could see the cut as a bit of a disappointment, as expectations for a bigger move were being priced in. According to some analysts, Donald Trump’s victory in last month’s Presidential election is driving fears that the European economy could struggle next year. It is expected that the President-elect’s focus on tariffs and enacting America-First economic policies will add to the economic malaise in Europe.
Despite the rate cut, gold prices are struggling against the euro. Spot gold last traded at €2.580.03 an ounce, down 0.30% on the day.
The uncertainty is reflected in the ECB’s staff projections, which see slower economic growth compared to the September forecasts.
“Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter. Staff see the economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. The projected recovery rests mainly on rising real incomes – which should allow households to consume more – and firms increasing investment. Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand,” the ECB said in its monetary policy statement.
While economic growth is expected to slow, the ECB sees inflation pressures stabilizing. According to staff projections, the central bank sees headline inflation averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027.
“The disinflation process is well on track,” the central bank said. “Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis. Domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay.”
Michael Brown, Senior Research Strategist at Pepperstone, said that these projections should be taken with a grain of salt as geopolitical uncertainty in Europe could continue to weigh on economic activity.
He added that he expects the ECB to continue to cut rates through 2025 as growth weakens and inflation falls.
“These projections, though, will likely have an incredibly short shelf-life, given that they take no account of recent political tumult in France and Germany, nor do they account for the potential impacts of any trade tariffs imposed by the incoming Trump Administration early in the new year,” he said in a note. “In light of these, and other, downside risks, coupled with continued disinflationary progress being made, further 25bp cuts, likely at each of the next four meetings, remains the base case. Risks to this outlook, of course, tilt towards a more dovish path, potentially including 50bp rate cuts.”
