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European Central Bank Follows US Fed’s Footsteps With 25 BPS Hike

On Thursday, the Governing Council of the European Central Bank (ECB) announced that it was raising “three key ECB interest rates” by 25 basis points (BPS) in a move similar to the one taken by the United States Federal Reserve. 

The US Federal Reserve, on Wednesday, increased its fund rates by an additional 25 BPS, its highest interest rate in 22 years.

European Central Bank In The Fight Against Inflation

The European Central Bank, in its statement, admitted that although inflation continues to decline, it is “still expected to remain too high for too long.” In a bid to fight inflation and return it to its 2% medium-term target in a timely manner, the governing council has continued to hike the interest rates for some time now, and this has further raised concerns for investors in the financial market as to whether or not there will be hikes before year ends. 

For context, the ECB has raised rates by 4.00% since last year July, accounting for the fastest-tightening cycle in its history. It is projected that this rapid increase in rates could negatively affect the expansion of loans in the European region and economic activity also. 

A quarterly poll released by the ECB on July 25 revealed that the companies’ demand for loans plunged to its lowest in the second quarter of this year. The eurozone has less developed and liquid capital markets than the United States, so there is an overreliance on banks in financing the economy. 

And now, according to ECB Chief Economist Philip Lane, the tighter monetary policy is massively impacting bank loans. So such policies will undoubtedly cause a liquidity squeeze. 

Bitcoin’s Role

Although inflation continues to decline, it is evident that the ECB and US Federal Reserve aren’t getting the desired results as to the target to which they want to bring inflation down to. As such, these financial bodies may continue increasing the rates to as high as possible despite the dramatic economic slowdown. 

Investors are aware of this position and are looking toward Bitcoin and other cryptocurrencies for succor. For a long time now, Bitcoin has been tagged as a ‘hedge against inflation,’ and it seems that many are realizing that this is more than a tag as Bitcoin has remained stable despite the growing rates, which many would have expected would send Bitcoin and the crypto market spiraling down. 

Unlike the United States, European investors are lucky to have more regulatory certainty in the region. The Markets in Crypto Assets (MiCA) regulation offers a sense of direction to stakeholders in the European crypto industry. This will help businesses and investors navigate their way when operating and dealing with crypto assets. 

Bitcoin price chart from Tradingview.com (European Central Bank)

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Will This Political Deal In The US Save Bitcoin and Crypto?

Politicians in the United States will likely strike a deal and raise the government’s $31.4 trillion debt ceiling for two more years. Amid this debate, the price of Bitcoin is firm but lower, tracking below the psychological $30,000 level as bulls recover after posting sharp losses mid-this week.

The Debt Ceiling Debate

There are reports that there will be more discretionary spending on the military and veterans with the reduction of other sectors.

Moreover, there are unconfirmed reports that the Biden administration will likely not fund the Internal Revenue Service (IRS) to boost collection, as laid out earlier.

Instead, the immediate focus will be to hire more auditors and target wealthy citizens.

There are concerns that the Treasury Department and the United States government will default on their obligation as soon as the first half of June 2023.

Even though highly unlikely, as the Treasury Department has said it will liquidate $119 billion of debt on that day, the market is watching how discussions pan out.

Bitcoin is firming up after losses on May 24.

Bitcoin Price On May 26| Source: BTCUSDT On Binance, TradingView

As a deal is reportedly struck and consensus reached, politicians would once again lift the debt ceiling, sending mixed signals to the economy.

Unlike in previous years when top cryptocurrencies were decoupled from the mainstream economy, things have changed as Bitcoin’s prominence rises.

Will Bitcoin Benefit?

BTC prices will likely rally if there is an instance of default brought about by politicians disagreeing on the way forward.

On the reverse side, a deal that addresses concerns brought by the negotiating parties could signal confidence in the economy despite more debt on the table.

This averts a crisis and keeps operations running, removing uncertainty and stabilizing the economy.

In that case, the USD could strengthen, possibly reversing gains by Bitcoin bulls in the last two trading days.

Still, the crypto community remains bullish on Bitcoin considering macroeconomic events and next year’s halving.

After months of steady interest rate hikes, the United States Federal Reserve could slow down rate increments in the next meeting in mid-June. Their action could support the commodities and securities markets.

At the same time, the expected supply shock following the halving of Bitcoin miner rewards could make BTC scarcer, driving prices even higher.

Miners are special nodes tasked with confirming transactions and decentralizing the network.

If past price action can be used to predict future formations, BTC’s prospects look positive. Before the rally of 2020 to 2021, BTC prices bottomed up in 2018 and rose in 2019 before the halving event 2020.

The same pattern may be repeated through to 2024 when Bitcoin halving occurs.