Gold update: ECB raises interest rates to highest level in history

The ECB increased interest rates by 25 basis points (0.25%) this week. The European Central Bank thus met the expectations of most analysts. Interest rates have now been increased 10 times in a row. The total increase since July of 2022 is 450 points (4.5%).

The ECB has thus raised interest rates to the highest level since its existence. The ECB was founded on June 1, 1998. But this week’s focus was mainly on the statements of the President of the ECB. What can we expect in the coming months? Lagarde indicated “we cannot say that we have reached the peak”.

The president of the ECB is probably taking a sensible position. The reason for the interest rate increases is the sharp increase in inflation. Inflation is falling after 10 increases, but the latest figures indicate a slowdown in the decline. The lower inflation is mainly the result of lower energy prices.

There is a chance that inflation will rise again in the coming months. This brings the danger of stagflation, a stagnant economy in combination with high inflation, closer. Central bankers have a tough job to keep inflation in check while not stifling the economy. The money creation and stimulus measures in recent years have gotten quite out of hand and we are now going to pay the price for that.

This week, the August inflation rate was announced in America. Inflation rose from 3.2% in July to 3.7% in August. In the Netherlands, inflation appeared to have fallen in August to 3% according to the CBS calculation method (3.4% based on the European calculation method).

Gold price rises after ECB interest rate hike

Despite the ECB’s rate hike, the euro lost half a percent of its value against the US dollar this week. The exchange rate closed at 1.066. Since the FED started raising interest rates in March 2022, the euro has lost 9.6% of its value.

Below is a graph showing the decline of the euro at the time of the interest rate increase:

The gold price rose this week to $1924 per troy ounce. In euros, the increase was slightly greater due to the decline of the euro against the dollar. Gold closed at €57,932 per kg and is up 6% this year. Silver closed at €694 per kg. The silver price is trading at a loss of just over 3% this year.

It is expected that the interest rate increases by both the FED and the ECB will come to an end this year. This also ends the biggest headwind for both precious metals. The strong US dollar is still a factor. The Dollar Index is at its highest point of the year.

The FED will make an interest rate decision next Wednesday at 8 p.m. The FED is expected to pause and therefore keep interest rates the same. A pause by the FED could put pressure on the dollar.

Agenda

The inflation rate in the eurozone will be announced on Tuesday. The expectation is an inflation of 5.3% and also a core inflation of 5.3%. The FED will make an interest rate decision on Wednesday. Furthermore, several members of the ECB will speak throughout the week.

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