According to an analysis from a Swiss private bank, both the Federal Reserve and the European Central Bank are set to hold monetary policy meetings this week, with the bank's Chief Economist and Head of Economic Research, Karsten Junius, suggesting that neither central bank needs to rush into raising rates in October.
Although inflationary risks persist, both institutions must weigh the inflationary pressure stemming from energy prices against the effects of tightening financial conditions, and the expectation is that the European Central Bank will keep rates unchanged.
The bank notes that in recent weeks, concerns over France's fiscal situation have driven government bond yields higher, widening spreads among peripheral eurozone nations and further tightening financial conditions within the region.
Consequently, the bank anticipates that the European Central Bank will only implement one more rate hike each in December and March 2027. European Central Bank President Christine Lagarde will inevitably need to address the issue of rising French bond spreads during her press conference; however, given that France has not fully complied with the eurozone's fiscal framework, the likelihood of the central bank intervening through its Transmission Protection Instrument (TPI) remains extremely low.
Regarding the United States, the bank believes that market-implied inflation expectations remain stable, and coupled with persistently tightening financial conditions, Federal Reserve Chairman Kevin Warsh still has room to observe patiently.
However, considering that inflation will struggle to return to the 2% target without further monetary tightening, the bank maintains its forecast of gradual rate hikes by the Federal Reserve, expecting a 25 basis point increase in December, followed by three more quarterly hikes next year, ultimately pushing the terminal rate to a range of 4.75% to 5% as demand gradually cools.
Additionally, the bank expects that gold will benefit once real yields begin to decline.
Citing historical gold returns, the bank points out that the negative correlation between gold returns and U.S. real yield levels has always been a short-term phenomenon rather than a sustained long-term trend.
Lingering geopolitical risks are expected to elevate risk premiums, supporting strong demand for gold from institutional investors and limiting the downside for gold prices even amid elevated real yields.
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