(Kitco News) - The gold market is coming off its earlier highs against the euro after the European Central Bank cuts interest rates, citing rising economic uncertainty and waning inflation pressures.
In an anticipated move, the European Central Bank once again lowered its three key ECB interest rates by 25 basis points on Thursday. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be cut to 2.00%, 2.15% and 2.40% respectively, the central bank said.
“In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission,” the ECB said in their statement.
The gold market is pulling back from its earlier highs in the wake of the ECB rate decision. Spot gold last traded at €2,970.03 per ounce, up 0.55% on the day.
The ECB painted a relatively positive picture of inflation in the Eurozone, but they reiterated their warnings about downside risks to the economy from trade tariffs.
“Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis,” the ECB said. “Wage growth is still elevated but continues to moderate visibly, and profits are partially buffering its impact on inflation. The concerns that increased uncertainty and a volatile market response to the trade tensions in April would have a tightening impact on financing conditions have eased.”
“The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target,” they concluded. “Especially in current conditions of exceptional uncertainty, it will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. The Governing Council’s 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.”
Michael Brown, Senior Research Strategist at Pepperstone, wrote in a comment to Kitco News that "the latest round of staff macroeconomic projections, again in line with expectations, pointed to slower growth, and lower inflation, than the profiles outlined at the end of Q1, a result of both elevated global trade tensions, and the considerably stronger EUR. Consequently, the CPI forecast was nudged a touch lower for both this year and next, while GDP growth expectations were also revised lower next year, while the 2025 forecast remained at a somewhat ambitious 0.9%."
Brown said market participants will want to see if ECB President Lagarde offers "any explicit remarks on the policy outlook, namely the potential timing of the next rate cut, whether this will come in July, September, or potentially even later."
"Other notable lines of questioning will likely include the degree of unanimity around today's rate cut, given the likely dissent from Austrian representative Holzmann, as well as the potential for Lagarde to be leaving Frankfurt early, given recent reporting around her taking over at the helm of the WEF."
Lagarde refused to offer any concrete guidance on future rate decisions during the press conference, but she left no ambiguity on her professional intentions.
"I have always been driven by my mandate, and I am determined to complete my term," she said. "Period."
