Yesterday, the European Central Bank released its most recent monetary policy statement. What does it imply for the gold market?
The ECB left interest rates unchanged again and neither expanded existing programs nor introduced any new policy measures. Similarly to the recent BoE meeting, the ECB sounded surprisingly hawkish, as it also downplayed Brexit risks a bit. Draghi said in his introductory statement to the press conference:
“Following the UK referendum on EU membership, our assessment is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience.”
He admitted during the Q&A session that Brexit would be negative for the European economy. According to preliminary estimates, it could cut economic growth by 0.2-0.5 percent. By the way, Draghi also noted that “the NPLs are certainly a significant problem for the future profitability, and for the capacity, the ability that the banks have of lending. So it is a problem that needs to be addressed because it’s an obstacle to the transmission of monetary policy”. However, he added that these forecasts should be taken with a “grain of caution”, as “it is too early to say what the impact is going to be”. And he highlighted once more the resilience of the European financial system:
“What is clear is that financial markets and the banking sector have reacted in a fairly resilient fashion to the event. We haven’t observed any disruption either in financial markets or the banking sector”.
The ECB’s inaction and cold blood signals that the European economy has not worsened so significantly as to act in a hurry and undertake an important decision without a proper assessment of the consequences of the Brexit vote. Therefore, the safe-haven bids for gold may unwind, as the fears about Brexit may be over.
Contrary to the BoE which suggested delivering monetary stimulus in August, Draghi provided no forward guidance, simply noting the lack of necessary information to undertake a rational decision at the time of the meeting:
“We concluded that we didn’t have information yet to take decisions, and we decided that over the coming months when we have more information including new staff projections we’ll be in a better position to assess the underlying macroeconomic conditions and no attention was really given to discuss specific instruments at this point in time.”
The bottom line is that the ECB left interest rates unchanged at its first meeting after the Brexit vote. It was positive news for the gold market, as the price of gold went up after Draghi’s press conference. The reason behind the rise may be the disappointed expectations of the ECB’s dovish actions. The hawkish inaction turned into a stronger euro and a weaker greenback, which eased for a while the recent downward pressure on gold.