In a move which brings it closer in line with the US approach, the European Central Bank (ECB) has decided to adopt the tolerance for inflation overshooting its target. But the ECB has also gone a step further; it has also raised its inflation target from “below, but close to, 2%,” to simply 2%. This move may give the ECB more room to keep accommodative monetary policy in place for longer to help support the region’s nascent economic recovery.
Changing ECB strategy could be supportive for European gold investment
*Data as of June 2021.
Source: Bloomberg, World Gold Council
What does this mean for European investors, who have been watching the wrangling within the ECB over the direction of monetary policy for months now? Well, it seems further indication of the central bank commitment to an ultra-loose monetary environment – i.e. more asset purchases and ultra-low interest rates – until it is comfortable that the economic recovery is well-established.
This, in our view, maintains a supportive environment for gold for three key reasons:
- Persistently low interest rates reduce the opportunity cost of holding gold
- It highlights the increasing difficulty for investors to achieve yield, with many moving into higher yielding assets which carry greater levels of risk
- keeps the spotlight on inflation as a potential threat, which investors have sought to hedge to protect capital.
Despite concerns that central banks may be wavering in their commitment to loose monetary policy following recent jumps in inflation, it seems the ECB are doubling-down. Given what this might mean for monetary policy going forward, we believe that gold investment among European investors will remain well supported.