Softer Inflation, harder central banks cushion bullion pack

• In a week dominated by central bank meetings, the end result was a more hawkish impression, despite November inflation data generally surprising to the downside. In the United States, the FED raised interest rates by 50 basis points, as expected, but with 17 of 19 FOMC members predicting a Fed funds rate above 5% in 2023 and Chairman Powell stating that the labour market is extremely tight and wage growth is high. However, Powell left the door open for more modest rate hikes in the future, and markets appear to have interpreted the meeting as more or less neutral.

• The ECB also raised interest rates by 50 basis points, as expected, but with a clear message that rates are rising and that this will not be the last 50 basis point increase. According to ECB projections, inflation will exceed the 2% target even in 2025, and the recession in 2023 will be very mild if rates follow pre-meeting market pricing, indicating that more hikes are needed and possible.

• The Bank of England also joined the 50bp hike club, but its message was more dovish than the FED or the ECB, given the weakening of the British economy.

• Retail inflation in the United States fell from 7.7 percent in October to 7.1 percent in November, while core inflation fell to 6% from 6.3 percent in October. While inflation remains higher than the Fed’s comfortable range, the slowing of inflation reinforces the view that the rate-hike cycle is nearing its end.

• While inflation is likely to have peaked, I believe central banks will continue to prioritise inflation control and raise interest rates until early 2023. Tightening cycles, however, are expected to end early next year, and as inflation falls, I believe most central banks will shift toward supporting growth. I anticipate that select G10 central banks will ease monetary policy by the end of 2023; however, emerging market central banks may decouple and begin easing cycles earlier in the year.

• Moreover, for the first time in more than three years, the People’s Bank of China reported an increase in gold reserves. In November, the PBoC increased its gold holdings by 32 tonnes over the previous month.

• Gold and Silver are expected to continue its uptrend, buy on dips for the target of Rs 55000 and Rs 70000 respectively.




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