Bank of America plans five interest rate hikes starting in 2022, but neutral rate will be capped at 2%

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(Kitco News) – Gold prices stand a chance of falling to $ 1,900 an ounce for most of 2022. Nonetheless, the precious metal will be caught between higher inflation and higher real interest rates. high, according to analysts at Bank of America.

In its latest World Economic Report, the bank noted that the Federal Reserve’s monetary policy remains the greatest threat to the precious metal.

“Central banks are moving closer to political normalization, with the US economy in the lead. Rising real rates and a strong dollar remain a major obstacle to the yellow metal,” analysts said in the report. “Soaring oil prices also add to macroeconomic volatility, but inflation is mostly seen as transient. And tightening output gaps should push central banks to normalize policy rates.”

Although Bank of America sees potential for higher gold prices next year, the gains may be limited. Market analysts are quite aggressive with their interest rate expectations. The bank said it sees the Federal Reserve hike interest rates five times, with the first rate hike taking place in the fourth quarter of 2022.

“We see risks around our outlook on the high side. Rates could rise if the outlook for Covid improves, supporting growth expectations, if inflation remains more persistent than expected, and employment recovers quickly. In the short term, sustainability, potentially driven by a persistent mismatch between supply and demand, could also lead to breakeven inflation and higher nominal rates, ”analysts said.

According to the CME FedWatch tool. Markets forecast that the Federal Reserve will increase interest rates by June 2022. Markets forecast interest rates to rise between 0.75% and 1.00% by February 2023.

Bank of America analysts added that economic data would determine the path of interest rates.

“Data over the next few months will be critical for the Fed. If we see any signs of relief on the supply side, it will leave the Fed comfortable to continue to signal that the end of tapering does not mean the start of the hikes and this take-off is unlikely before the end of next year. But the Fed will have to step up sooner if supply-side constraints and high inflation persist, wage inflation picks up and expectations inflation continue to climb, ”analysts said.

Although the Federal Reserve is supposed to lead central banks in rate hikes, Bank of America predicts a lower neutral rate environment going forward.

“The Fed will likely be constrained to the extent that it can raise rates due to headwinds of structural inflation (technology, demographics, globalization) and growth that will slow significantly in the years to come. debt incurred since the pandemic risks a level of interest rates that the economy can tolerate before slowing down; this suggests a relatively low neutral interest rate, likely between 1.75% and 2% for USTs at 10 years, ”analysts said.

According to analysts, a neutral rate of 2% is also the grace of gold’s long-term savings.

“Our rate strategists note that 10-year rates above 2% will raise concerns about debt sustainability; equity markets could also come under pressure at this level. This means that real rates will likely stay negative. in the future, ”analysts said. “Overall, while gold may find support, we ultimately believe headwinds persist and the upside may be limited in the near term.”

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and / or damage resulting from the use of this publication.

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