ECB Delivers First Rate Cut in 5 Years, Crypto Market Braces for Impact
On Thursday, European Central Bank (ECB) President Christine Lagarde announced a widely anticipated cut to the bank’s key interest rate.
The ECB trimmed rates by 25 basis points to 3.75%, the first rate reduction since September 2019. This indicates a shift in the central bank’s monetary policy stance after nine months of holding rates steady at a record 4%.
The ECB Rate Cut Decision
The rate cut decision was driven by an updated assessment showing an improved inflation outlook, with the ECB staff raising their 2024 headline inflation forecast to 2.5% from 2.3% previously.
We cut our key interest rates by 0.25 percentage points.
Keeping interest rates high for nine months has helped push down inflation.
It is now appropriate to moderate the degree of monetary policy restriction.
Read our monetary policy decisions https://t.co/AaaLd3hGEB pic.twitter.com/dTTYKg7itm
— European Central Bank (@ecb) June 6, 2024
Despite inflationary pressures in the 20-nation eurozone, the ECB stated that “it is now appropriate to moderate the degree of monetary policy restriction” based on the inflation dynamics and strength of policy transmission.
According to Dean Turner, chief eurozone economist at UBS Global Wealth Management, a follow-up cut is expected by September if deliberation in the next ECB meeting in July goes well.
“Inflation has been printing a little bit hotter than markets were expecting, but in terms of the timing of the next cut I’d still be looking to September,” Turner
Notably, the June rate cut puts the ECB ahead of the U.S. Federal Reserve in easing monetary policy, as the world’s largest central bank is still battling high inflation in the United States.
Other major central banks, such as the Bank of Canada, Sweden’s Riksbank, and the Swiss National Bank, also announced rate reductions earlier this year.
All but one of the 20 national representatives on the ECB’s Governing Council supported the decision to cut rates. However, President Lagarde concealed the details about the dissenting member during the press conference.
Crypto Market Implications
The ECB’s rate cut could significantly impact the cryptocurrency market. In the past, similar monetary policies designed to keep interest rates low have always been a bullish catalyst for crypto assets like Bitcoin and Ethereum.
In the last 48 hours:
• $BTC ETF flows exceed $1.37b – the largest positive flows since launch
• Robinhood acquires Bitstamp
• Binance resumes Mastercard payments for crypto
• ECB and Canada cut rates for the first time in 4+ yearsIt's time to lock the f*ck in.
— Miles Deutscher (@milesdeutscher) June 6, 2024
Lower interest rates make cryptocurrencies relatively more attractive to investors, and rate cuts often fuel liquidity and risk appetite in markets, which can potentially drive capital into the crypto space.
The ECB has capitulated and cut interest rates.
The system is too powerful now. The market needs cheap money to flow.
Doesn't mean every central bank is going to cut rates immediately, but eventually the Fed and everyone else will capitulate too.
— Pomp 🌪 (@APompliano) June 6, 2024
This news from the ECB comes amid other positive news in the crypto sector, further pushing the narrative that a bull’s run is imminent. Earlier this week, we reported that Robinhood will acquire Bitstamp in a $200 million all-cash deal.
James Wo, founder and CEO of Digital Financial Group, also suggests that the rate cut could affect traditional equity markets with positive spillover effects for Bitcoin. “As liquidity shifts towards riskier asset classes, the leading cryptocurrency could experience upward price momentum.”
Historically, Bitcoin’s correlation with equities has been interwoven. During economic stress, the digital asset often mirrors stock market trends as investors liquidate holdings.
Generally, market analysts suggest that the ECB’s rate cut could uplift the crypto market, particularly if followed by subsequent rate reductions later this year as some economists predict.
However, the impact may be reduced by the fact that markets had already priced in on Thursday’s 25 basis point move.
Furthermore, new data published by Philip Swift, the creator of the analytics platform LookIntoBitcoin shows that Bitcoin could boost its current bull thanks to a record-high global liquidity.
The most important chart for this bull run has just made a new all-time high.
Are you ready?#bitcoin pic.twitter.com/hZsF6ljsvR
— Philip Swift (@PositiveCrypto) June 5, 2024
According to LookIntoBitcoin, the world’s M2 money supply stands at $94 trillion – $3 trillion higher than when Bitcoin surpassed $69,000 in 2021. Swift says this is an important indicator and it just hit a new record high.
Bitcoin trades at $71,052 at press time, up by 2.54% this week.
