Yesterday, the European Central Bank released its most recent monetary policy statement. What does it imply for the gold market?
The ECB meeting has probably been the most important event this week so far. The Governing Council decided that the interest rate on main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 0.00, 0.25 and -0.40 percent, respectively. The ECB also confirmed that it would continue to make purchases under the asset purchase program (APP) at the current monthly pace of €80 billion until the end of this month and of €60 billion from April 2017 until the end of December 2017, or beyond, if necessary.
The lack of any changes is a bit surprising, given the rise in inflation in the Eurozone. As Draghi pointed out in his introductory statement to the press conference, the HICP inflation in the euro area increased further to 2.0 percent in February, up from 1.8 percent in January 2017 and 1.1 percent in December 2016. However, he judged it to be “transient and to have no implication for the medium-term outlook for price stability:”
“This reflected mainly a strong increase in annual energy and unprocessed food price inflation, with no signs yet of a convincing upward trend in underlying inflation. Headline inflation is likely to remain at levels close to 2% in the coming months, largely reflecting movements in the annual rate of change of energy prices. Measures of underlying inflation, however, have remained low and are expected to rise only gradually over the medium term, supported by our monetary policy measures, the expected continuing economic recovery and the corresponding gradual absorption of slack.”
Central bankers have repeated for years that there is nothing to worry because deflation is only transitory, but when prices come back, we are told that these increases are also transient. Are there any lasting phenomena in that turbulent world? Jokes aside, it seems that the ECB decided to sit tight ahead of key European elections in the Netherlands and France.
The bottom line is that the ECB did not modify its monetary policy at the March meeting. The ECB’s inaction and the likely Fed hike next week should strengthen the U.S. dollar, which is bearish for gold. However, the ECB’s economic projections were more optimistic, while Draghi adopted a more hawkish tone during the Q&A part of the press conference. This is why the meeting looked a bit contradictory and its impact on the gold market was limited (at least, during the morning session).
When you read between the lines, it turns out that the next steps undertaken by the ECB may have a rather hawkish flavor (but probably not before the French elections), which may be positive for the yellow metal. We will dig into Draghi’s comments next week. Now, all eyes are on today’s U.S. non-farm payrolls and on the FOMC monetary policy meeting scheduled next week.