Yesterday, the European Central Bank released its most recent monetary policy statement. What does it imply for the gold market?
It was a busy week for central banks, as the Bank of Canada, the Reserve Bank of Australia and the European Central Bank held their monetary meetings. All three central banks kept their benchmark interest rates unchanged. The Bank of Canada maintained its target for the overnight rate at 0.5 percent, arguing that underlying economic conditions did not warrant a change in policy at this time. The inaction was expected, despite the fact that the economy contracted at an annual pace of 1.6 percent in the second quarter due to Alberta wildfires and a drop in exports. The U.S. dollar strengthened after the release of the statement, which did not support the gold market.
The Reserve Bank of Australia decided to leave the cash rate unchanged at 1.5 percent, as expected. It was the last decision presided by the outgoing governor Glenn Stevens. The greenback lost against the Australian dollar after the RBA’s decision, which might have supported the gold market a bit.
However, the ECB meeting was definitely the most awaited event this week. 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. Importantly, the ECB continued to “expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases”. On the other hand, the ECB repeated that its program of monthly asset purchases of 80 billion euros will continue until at least the end of March 2017. Therefore, it neither expanded existing non-standard monetary policy measures nor introduced any new policy tools.
The ECB’s unchanged stance was interpreted as hawkish, since Draghi refrained from any action, despite the lowered macroeconomic projections. Indeed, “compared with the June 2016 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised downwards slightly”, Draghi said in his introductory statement to the press conference. The euro hit a two-week high of $1.1328, after Draghi said the Governing Council had not discussed an extension of its asset purchase program. However, gold prices fell both in the euro and in the U.S. dollar after the release of the statement.
The bottom line is that the ECB left interest rates unchanged again at its meeting in September, despite the downgraded macroeconomic projections. The statement was a disappointment for many traders, who hoped for a more dovish message, but gold did not get a boost, despite the initial weakening of the U.S. dollar (the rise in the EUR/USD exchange rate was only temporary). Actually, gold ended the U.S. session lower. Now, all eyes are on the Bank of Japan and the Fed, which have monetary policy meetings scheduled later this month.