This is the largest rate cut since the COVID-19 pandemic.
In such a scenario, bitcoin can stand out as an investment and store of value asset.
Globally, there is a trend of cuts in interest rates, which represents an injection of liquidity to the economy and also to the financial markets.
According to the count from Bank of America (BofA), There are 21 central banks that decreased the interest rate in september. Some of these are those of the United States (the Federal Reserve or Fed) and the European Union. This is the largest interest rate cut since 2020.
The following graph prepared by BofA illustrates the situation:
For the analysts of the financial newsletter ‘The Kobeissi Letter’, the situation is described as “incredible.” They highlight the fact that “outside of the response to the pandemic, this is the third largest month of monetary easing since 2008.
And all this happens while many hope for a “soft landing” which, as CriptoNoticias has explained, is a hypothetical period of drops in interest rates but without this harming the economy or the standard of living of the inhabitants of a nation.
‘The Kobeissi Letter’ analysts are skeptical that this soft landing can be achieved. They assure that It is not at all easy to make such a situation occur.:
“Since 1980, the Federal Reserve has only managed a soft landing [a mediados de la década de 1990]which was described as one of his greatest achievements. However, only 17% of rate cut cycles have ended in a soft landing, raising the question: Can the Fed really pull it off now?
The Kobeissi Letter, financial analysis newsletter.
As arguments to explain the difficulty of achieving this soft landing, analysts point out that, for example, a new contraction is expected for Germany’s gross domestic product (GDP). If this were to happen, it would be the first time it has contracted for two consecutive years since 2002.
They add that China—despite the rebound in its stocks—“is on track to miss its 5% annual economic growth target as it fights the streak of deflation that has extended since 2009.”
For all this, Kobeissi analysts ask, with some irony: “Can central banks really save the situation in this case?” The implicit answer is no.
Why are interest rate cuts a sign of global crisis?
The simultaneous cut in interest rates by multiple central banks around the world is a signal that should not be taken lightly. Although in the short term it may represent an injection of liquidity to the economy, which could boost spending and investment, at a macroeconomic level these cuts reflect Deeper concerns about global financial stability.
This is because economies that have reduced their rates generally do so in response to signs of economic slowdown or structural problems that threaten to generate recessions.
Historically, Interest rate cuts have been a measure used to revive struggling economies. In this case, the magnitude of the cut, the largest since the COVID-19 pandemic, suggests that central banks are reacting to a context that could be deteriorating rapidly.
The timing of these cuts, or at least the coincidence in timing (which is unlikely to be a mere coincidence), indicates that economies globally are experiencing similar challenges: slower growth, persistent inflation, and problems in supply chains. supply. These factors highlight that the concerns are global, and not limited to a particular country or region. See, for example, the following graphic prepared by Reuters showing interest rates in various economies from September 2021 to September 2024.
Interest rate cuts are usually accompanied by warnings about the risk of a prolonged recession. In fact, the inability to control inflation without generating a severe economic contraction is one of the biggest challenges facing central banks. The fear that a crisis is brewing is justified when signs of slowdown are observed in the world’s main economies, such as Germany and China, which are going through significant economic problems.
Good news for bitcoin
In the midst of this scenario of rate cuts and concern about global economic stability, bitcoin (BTC) has a high chance of coming out stronger. Historically, bitcoin has proven to behave as a safe haven asset in times of financial uncertainty (although it can have high volatility and is often considered a “risk” asset).
When central banks inject liquidity into the economy, as they do by reducing interest rates, demand for assets that preserve value against a possible devaluation of fiat currencies usually increases.
With interest rates low, investors tend to look for alternatives that offer more attractive returns than Treasury bonds (considered “the safest investment in the world”), and this is where bitcoin comes into play.
As rates fall and bonds or other traditional instruments offer less return, interest in bitcoin may increase. This also reinforces its appeal as a decentralized store of value, outside the control of governments.
Furthermore, if inflation remains high and fiat money is devalued due to these monetary easing policies, bitcoin, with its limited supply of 21 million coins, could stand out as a hedge against inflation. So, the narrative of bitcoin as “digital gold” would begin to shine much brighter.
This economic panorama, with its implications of risk and opportunities, is shaping up to be the catalyst that leads bitcoin to stand out even more in the global financial landscape.