Bank of America sees five interest rate hikes starting in 2022, but neutral rate will be capped at 2%
(Kitco News) - Gold prices have a chance to push back to $1,900 an ounce throughmost of 2022. Still, the precious metal will be caught between higher inflationand higher real interest rates, according to analysts at Bank of America.
In its latest global economic report, the bank noted that theFederal Reserve'smonetary policy remains the biggest threat to the precious metal.
"Central banks are moving closer to policy normalization,with the U.S. economy leading. Rising real rates and a strong USD remain a keyheadwind to the yellow metal," the analysts said in the report. "Spiking oil prices areadding macro volatility too, but inflation is mostly perceived as transitory.And tightening output gaps should push central banks towards normalizing policyrates."
Although Bank of America sees potential for higher gold pricesnext year, gains could be limited. The market analysts are pretty aggressivewith their interest rate expectations. The bank said it sees the FederalReserve raising interest rates five times, with the first rate hike coming inthe fourth quarter of 2022.
"We see risks around our forecast as to the high side.Rates could move higher if covid outlook improves, supporting growthexpectations, if inflation remains more persistent than expected, and ifemployment recovers quickly near-term. Increased concern over high inflationbecoming more lasting, potentially driven by a continued supply / demandmismatch could also prompt higher inflation breakevens and nominal rates," theanalysts said.
According to the CME FedWatch Tool. Markets are forecasting theFederal Reserve to raise interest rates by June 2022. Markets see interestrates rising to between 0.75% and 1.00% by February 2023.
Bank of America analysts added that the economic data woulddetermine the trajectory of interest rates.
"The data over the next several months will be criticalfor the Fed. If we see signs of relief on the supply-side, it will leave theFed comfortable to continue to guide that the end of tapering does not mean thestart of hikes and that liftoff is unlikely until the end of next year. But theFed will need to hike earlier if supply-side constraints and elevated inflationpersist, wage inflation picks up and inflation expectations continue to climb,"analysts said.
Although the Federal Reserve is expected to lead central banks inrate hikes, Bank of America does see a lower neutral rate environment goingforward.
"The Fed will likely be limited in how high they canraise rates due to structural inflation headwinds (technology, demographics,globalization) & growth that will decelerate meaningfully in the yearsahead. A higher quantity of debt incurred since the pandemic risks level ofinterest rates that the economy can tolerate before slowing; this suggests arelatively low neutral rate of interest likely between 1.75%-2% for 10Y USTs," theanalysts said.
A neutral rate tapped out at 2% is also gold's long-term saving grace, according to the analysts.
"Our rates strategists note that 10Y rates above 2% willraise concerns over debt sustainability; equity markets may also come underpressure at that level. This means that real rates will likely remain negativein the future," the analysts said. "All in, while gold may find support, we ultimatelybelieve headwinds persist and the upside may be limited near-term."
By Neils ChristensenFor Kitco News
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