The European Central Bank (ECB) announced yesterday that it would leave the key rate for the euro zone at 0%. This is despite the fact that the Eurozone is struggling with record inflation of 7.5% in March. Bitcoin fans cheer.
During the monetary policy meeting on April 14, the ECB Council declared that it had no intention of modifying the key rate. However, bond purchases by the ECB are expected to end in the third quarter. The US Federal Reserve already announced in March that it would raise the US key rate to 0.25%. Does this look like price stability after Corona? We show at the end of the article how this could affect Bitcoin and Ethereum.
Inflation has been on an upward trend in the Eurozone since December 2020. With one exception, every month since then has posted higher inflation rates than the previous one. Countries like Lithuania and Estonia have been suffering from inflation rates well above 10% for months. But at 7.5%, the eurozone also hit its highest inflation rate since 1999.
What does it mean? Goods and services become more and more expensive every month. A surplus of money on services. The easiest way to show it is with a cup of coffee:
Experts wonder: what is the ECB doing?
The objective that the ECB must pursue is in fact enshrined in the European treaties. There it is determined that price stability has top priority – but the ECB interprets price stability as annual inflation of 2%. Since then, central bankers have been trying to achieve this goal through ultra-loose monetary policy and bond purchases. With a base rate of less than one percent since 2011 they only managed to do so in 2018. So printing more money seems to be the answer. Economists such as Hans Werner-Sinn and Jörg Krämer have criticized the ECB’s accommodative monetary policy.
Fear of ending an economic recovery at an early stage seems to be suffocating the Council. Memories of the 2008 financial crisis are still too fresh: at that time, the ECB raised its key rate prematurely, believing that the crisis was over and that it would contribute to a sluggish economy in the years that followed. Measured as gross domestic product, economic output was negative in 2012/13.
What does this mean for cryptocurrencies? Bitcoin, Ethereum and Co. as an asset class
While in times of restrictive monetary policy, the most conservative assets benefit from increased attention, in times of accommodating monetary policy, it is risky assets. Due to certain factors, such as liquidity or efficiency, cryptocurrencies are considered risky by professional investors.
A lax monetary policy, such as that of the ECB or the FED, is therefore useful for the valuation of cryptos. Investors can borrow from banks very cheaply, leading to increased demand for assets. Stefan Berger, who sits on the European Parliament’s Economic and Monetary Affairs Committee, is also optimistic:
With its limited supply of 21 million bitcoins, we are heading into a period of increased demand with extremely low supply. Additionally, the Bitcoin Halving, which takes place every four years, halves the reward for a newly mined block. Ethereum is very similar with the upcoming merger. After the merger, less Ethereum is expected to hit the market each year.
A waiver from the zero interest rate policy is not to be expected, at least until the third quarter of 2022. High inflation makes perfect sense for eurozone member states, as borrowers in such a scenario will find it is cheaper to borrow. Since the debt ratio in the euro area has increased significantly in almost all countries after Corona, inflation is definitely advantageous for the states as debtors. States can more easily repay the same loans through higher tax revenue.
It looks like inflation will continue to worsen in the coming months. Buy Bitcoin 😉 (and DYOR – Do Your Own Research)!
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