Gold off its lows as ECB leaves rates unchanged even as inflation remains elevated

In a much-anticipated move, the ECB announced that it would leave its main refinancing operations and the marginal lending facility unchanged at 2.50%, 2.65% and 2.90%, respectively.

“While the full effects of the energy shock are still unfolding, underlying inflation has remained broadly stable so far and wages do not show a material response at this stage. The increased magnitude and duration of the energy shock, as well as the implications for indirect and second-round effects, are likely to drive up inflation and lower growth,” the analyst said.

The gold market has managed to bounce off its lows in its initial reaction to the ECB, it still remains under pressure. Spot gold last traded at €3,619.95 an ounce, down 0.75% on the day.

Gold is holding up better against the euro compared to the US dollar. The yellow metal continues to test critical support above $4,000 an ounce and is down roughly 1% against the greenback.

Higher interest rates have weighed on gold prices through the summer; however, some analysts note that sentiment in the market could be shifting as it is becoming unlikely that central banks will be able to get in front of the growing inflation threat.

Analysts note that if inflation pressures rise faster than interest rates, real rates will start to drop, reducing gold’s opportunity costs as a non-yielding asset.

“The Bank has warned that inflation risks are rising, yet it cannot sound too hawkish without worsening already fragile sovereign borrowing costs. That turns the euro into a currency carrying both an energy-inflation premium and a policy-credibility discount,” said. Naeem Aslam, CIO of Zaye Capital Markets. “Until the ECB shows that it can confront higher energy prices without destabilising bond markets, every inflation warning may perversely become another reason to sell the euro.”