European Central Bank Cuts Rates—What It Means for the Fed and Bitcoin

The European Central Bank (ECB) lowered its three key interest rates by 25 basis points each on Thursday—and crypto bulls are anticipating a potential boost to Bitcoin's price, particularly amid speculation that the Fed could follow suit.

The organization’s new rate for its main refinancing operations is now 4.25%. Meanwhile, the rates for its marginal lending facility and deposit facility are now 4.5% and 3.75%, respectively. This marks the central bank’s first rate cut in nearly five years.

“Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly,” wrote the ECB in a Thursday press release. “It is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady.”

The ECB’s decision proves that a global central bank pivot is now well underway, after monetary authorities across the globe raised rates to address surging inflation during the Covid-19 pandemic. The Swiss Central Bank already announced its first 25 basis point cut in March, while the Bank of Canada confirmed its first cut in four years on Wednesday.

The question now is whether the United States Federal Reserve will soon follow suit. A similar move could prove bullish for stocks and crypto alike, which historically perform well during periods of cheap borrowing and money supply growth.

However, unlike other regions, inflation in the United States remains stubbornly above 3%, while Fed officials refuse to accept any result less than its 2% target.

In a Monday interview, Neel Kashkari—president of the Federal Reserve Bank of Minneapolis—argued that citizens would rather put up with a shrinking economy than with persistently high inflation.

Combined with continued resilience in wage growth and the labor market, he expects rates to remain high for some time.

“If I look at this resilience and economic activity, that does not look like an economy that is under pressure of very high, very tight monetary policy," he said

According to CME FedWatch, the consensus view is that rate cuts will arrive later this year—possibly in September, and almost certainly by November. June, however, is considered to be almost certainly a write-off.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” wrote the Federal Reserve in a statement following its last meeting in May.

Interest rate cuts are historically positive for Bitcoin and other leading cryptocurrencies, with some analysts pegging BTC's recent price uptick on bets that the Fed and others will indeed trim down rates.

Even so, prominent BitMEX co-founder Arthur Hayes has theorized that money supply growth—and hence, new highs for Bitcoin—will happen regardless of whether the Fed cuts rates or not.

The U.S. Treasury, for example, must continue making high interest rate payments to bondholders while rates are elevated, putting money in people’s pockets and counteracting the intended effect of higher rates.

“When you combine Fed and Treasury activities, the net is an injection of $21 billion per month,” Hayes wrote to Twitter in February. “This is one reason why tech/AI [and] crypto are pumping and will continue to pump.”

Edited by Andrew Hayward