• Thu. Apr 18th, 2024

Bitcoin to Face Test if Central Bank Hikes Rates

Sep 24, 2021

In the coming months, the price of the world’s first cryptocurrency, along with some of the other crypto-assets could face some headwinds, as central banks all over the globe prepare to wave goodbye to the ultra-loose monetary policies that had been implemented in light of the COVID-19 pandemic. The Norges Bank, which is the central bank in Norway, has just become the first central bank to do so in a Western developed nation following the onset of the pandemic. There was a rate hike from 0% to 0.25% this week in Norway, as the central bank cited a need to begin normalizing the policy rate gradually, with the economy also ‘normalizing’. 

Norges Bank justified the hike in the interest rate by stating that there had been a marked upswing in the country’s economy after the reopening of society, and activity had also gone beyond its pre-pandemic level. It also added that there was going to be another rate hike in December. In itself, the rate hike in Norway may be insignificant, but central banks have the tendency to follow each other where interest rate policies are concerned. On Thursday, while the Bank of England (BoE) kept its interest rates unchanged, it did set the stage for introducing tighter monetary policies in the future.

It warned that global inflationary pressures were strengthening and cost pressures may continue to be persistent. Likewise, the US Federal Reserve also chose to keep their rates unchanged this week, but it noted that inflation is elevated and that it would continue to increase for some time. The Fed chairman, Jerome Powell, said that they could begin tapering off their bond-buying program worth $120 billion for supporting the financial markets as early as November. As the job market tightens and inflation goes up, the Fed will eventually raise rates and taper off. 

Even though it is assumed that high inflation can benefit Bitcoin, increasing interest rates is considered a headwind for assets like gold and bitcoin because they make bank deposits attractive. However, it is important to note that even if the Fed was to increase interest rates, the real ones after adjusting for inflation, would still remain negative. Regardless, taking into account bitcoin’s price history recently, even the talk of potential increase in interest rates, particularly in the US, have resulted in losses for the leading cryptocurrency. The central bank meetings in both April and June resulted in a selloff of 2 to 5% on the next day. 

However, after this week’s meeting in which the Fed decided to keep the rates unchanged, bitcoin reacted the opposite because it traded higher for the next two days. It was only after China’s announcement of a ban that resulted in a selloff on Friday. The tightening crackdown in China against bitcoin and other cryptocurrencies resulted in a 6% drop in the price of the pioneer cryptocurrency in a day and the loss in the week was 13%. While this reaction after the central bank’s meeting may have been surprising, the future could be risky for Bitcoin. 

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