The European Central Bank (the ECB) is ready to allow inflation targets to exceed. The European Union (hereinafter - the EU) adapts the approach that was adopted by the US Federal Reserve. However, the ECB went even further. Bank executives agreed to raise the inflation target to 2%. The previous target was slightly lower, but approaching 2%, but some ECB leaders considered this indicator too vague. In early July, for the first time in almost 20 years, the ECB held a special meeting to review its strategy.
The updated strategy will allow the ECB to pursue for a long time an ultra-soft monetary policy aimed at restoring the region's economy after the coronacrisis. The ECB has long been trying to increase its inflation target, as the low figure, according to representatives of the bank, limits the economic potential of the eurozone. The ECB management is expected to begin discussing the gradual curtailment of incentives, including an emergency asset buyback program of 1.85 trillion euros.
It should be noted that back in June, Christine Lagarde, the head of the ECB, announced a symmetrical approach to inflation, which implies the bank's readiness to immediately take measures in response to too low or high inflation rates. A change in the ECB's inflation strategy has confused observers and financial market participants.
What does this mean for European investors, who have been watching disputes within the ECB over the direction of monetary policy for several months? This indicates that the bank will continue to buy assets and pursue a soft monetary policy to achieve a stable level of economic growth.
The implementation of the ECB's new strategy will create favourable conditions for gold appreciation for three reasons:
1. Setting low interest rates will reduce the alternative costs of owning yellow metal.
2. An increase in inflation will reduce the profitability of risky assets.
3. High inflation poses a potential threat that investors will try to hedge to protect capital.
Based on such conditions, it is necessary to expect an increase in investments in gold among European investors and an increase in its quotes.