In an unexpected move on Thursday, the European Central Bank (ECB) raised its key interest rates by 25 basis points, citing persistent inflationary pressures. The decision will come into effect from September 20, 2023. The ECB has increased the interest rate on the main refinancing operations, as well as the rates on the marginal lending facility and the deposit facility to 4.50%, 4.75%, and 4.00% respectively.
The ECB’s decision comes as it lowers its growth forecasts and increases its inflation expectations for the Euro area. According to the ECB’s latest macroeconomic projections, average inflation is expected to be 5.6% in 2023, followed by 3.2% in 2024, and finally cooling down to 2.1% in 2025. This represents an upward revision for 2023 and 2024 and a downward revision for 2025.
The central bank has also revised down the projected path for inflation excluding energy and food to an average of 5.1% in 2023, then decreasing to 2.9% in 2024, and further dropping to 2.2% in 2025.
In light of these developments, the ECB has significantly lowered its economic growth projections for the Euro area. The bank now expects the economy to expand by a mere 0.7% in 2023, improving slightly to 1.0% in 2024, and further to 1.5% in 2025.
This tightening of monetary policy is expected to impact domestic demand and the international trade environment negatively. The ECB noted that increasingly tighter financing conditions are dampening demand, which it sees as a crucial factor in bringing inflation back to its target of around 2%.
Despite these significant policy changes, the gold market did not react significantly to the ECB’s latest decision. Spot gold against the euro last traded at €1,782.44 an ounce, up 0.24% on the day. In comparison, against the dollar remained roughly unchanged, last traded at $1,908.60 an ounce.
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