Draghi Won’t Send A Rate Hike Gift To The Gold Bulls

The ECB eased its monetary stance. It launched another round of cheap loans to banks and promised to keep interest rates unchanged this year. It means that Draghi will not hike during his presidency. What does it all mean for the gold market?

ECB Unveils New Monetary Stimulus in Response to Slowdown

The ECB left its interest rates unchanged. But it pushed out the timing of its first post-crisis rate hike until 2020 at the earliest. As we can read in the monetary policy statement.

The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. 

It means that Mario Draghi will end his mandate as the ECB President without hiking the interest rates. Moreover, the ECB slashed its growth and inflation forecasts for 2019 and lowered those for 2020 and 2021. The bank now sees eurozone growth at barely 1.1 percent this year, compared to the 1.7 percent it projected in December. And it sees the CPI rate to rise only to 1.6 percent in 2021. Acknowledging that Europe’s slowdown could be longer and deeper – after all, Germany stagnated in the fourth quarter, while Italy was in outright recession – the ECB offered banks a new round of cheap loans, called TLTRO-III, to help revive the euro zone economy.

A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favorable bank lending conditions and the smooth transmission of monetary policy.

In short, according to Draghi, “we’re coming – and maybe we still are – in a period of continued weakness and pervasive uncertainty”. This is why the economic forecast has been revised downward – and why the ECB consequently eased its monetary stance.

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