On Thursday, the European Central Bank (ECB) announced an interest rate hike of a quarter percentage point to curb inflation. This marks the ninth consecutive increase, bringing the current deposit rate to 3.75 percent, matching the ECB's highest rate ever recorded in 2000.
 

Interest rate increase

Raising interest rates is a method used by central banks to combat inflation. Higher interest rates are intended to slow economic activity, as borrowing becomes less attractive for consumers, making them more hesitant to purchase big-ticket items like cars or homes.
 
For instance, a loan for a car that previously had an interest rate of 6 percent is now closer to 9 percent. Similarly, mortgage rates have risen significantly, from just over 1 percent at the beginning of 2022 to nearly 5 percent today.
 

Inflation

According to the ECB, the previous rate hikes are having an impact. “Inflation is continuing to decline, but it is still expected to remain too high for too long,” the ECB stated in a press release.
 
The inflation target of 2 percent is not yet within reach, and core inflation in the eurozone even ticked up slightly from 5.3 percent in May to 5.4 percent in June. “The economy is expected to remain weak in the short term,” said ECB President Christine Lagarde during Thursday’s press conference. Over time, factors such as declining inflation and rising incomes are expected to support economic recovery, she added.
 

Further rate hikes

Further rate increases are not off the table. When asked whether the ECB would raise rates again at its next meeting in September, Lagarde did not provide a definitive answer, stating that it depends on the economic data at that time.
 
However, if the ECB pauses rate hikes, it does not necessarily mean a prolonged break. Lagarde noted that the ECB could resume rate increases after a one-month pause.
 

Federal Reserve interest rates

The U.S. Federal Reserve (Fed) raised its policy rate by a quarter percentage point on Wednesday, bringing it to the highest level in 22 years. The current rate in the United States now ranges from 5.25 to 5.5 percent. Core inflation in the U.S. has already fallen from 5.3 percent in May to 4.8 percent in June.
 
Last month, the Fed paused its rate hikes, but Wednesday’s press conference revealed that the end of rate hikes is not yet in sight. Fed Chair Jerome Powell indicated that the Fed may raise rates again in the coming months.
 

Impact on gold prices

The World Gold Council previously noted that monetary tightening by the Federal Reserve usually has a positive long-term effect on gold. Leading up to an interest rate hike or balance sheet reduction, precious metals tend to underperform compared to the stock market. 
 
However, after the rate hike takes place, gold often performs better. Historical periods of monetary tightening (February 1994, June 1999, June 2004, and December 2015) show that gold emerges stronger overall. On average, the gold price rose by more than 10% in the first six months following these four periods of tightening. A year after the tightening, the price had increased by an average of about 7.5%.
 

Buying gold at The Silver Mountain

At The Silver Mountain, you can easily and securely buy gold online. Our gold comes from certified producers, and its authenticity is guaranteed. We also offer a buyback guarantee for all gold bars and coins we sell. You can choose to collect your order from our office, have it shipped insured to your address, or opt for direct insured storage of your physical products.
 
Disclaimer: The Silver Mountain does not provide investment advice, and this article should not be regarded as such. Past performance is no guarantee of future results.