Global interest rate policy is headed even lower.
As human beings, we tend to focus on the micro. We spend the bulk of our lives figuring out how to better ourselves and achieve our maximum potential. Growing up, we focus on school and sports to get smart, build work ethic, and learn to work with others. And then as adults, we work to provide a better life for our children than the one experienced growing up.
Wall Street isn’t much different. Fund, managers, stock pickers, traders, you name it, all have areas where they’re experts. A fund manager might specialize in a certain investment strategy, an analyst in a specific sector, or a trader in a particular asset class. But most of the time, due to the multitude of opportunities, their focus tends to be on one country.
So, focusing on what’s happening in our immediate vicinity is almost ingrained. But, due to this concentration, we can sometimes miss the big picture events that are happening around us.
Often, I see this with central bank policy. Investors tend to focus on what’s happening at home with our economy and the Federal Reserve. Or, if they branch out, they’ll consider what’s happening in Europe and the European Central Bank (“ECB”).
But many times, investors on Wall Street and Main Street pay little heed to what’s happening in economies outside of those regions. Consequently, they pay even less attention to what’s happening at central banks outside of the majors. I get it, the U.S. and Europe (in aggregate) make up the world’s two largest economies.
Well, right now, based on what I’m seeing, those policymakers outside of the major economic centers are becoming more accommodative. In other words, it’s going to cost less to borrow money moving forward. That means global liquidity should improve, boosting the outlook for risk assets like cryptocurrencies.
But don’t take my word for it, let’s look at what the data’s telling us…
In late 2021/early 2022, the global economy watched inflation growth skyrocket. In 2020, most nations were dealing with pandemic-driven shutdowns. So, to keep people at home, governments provided individuals with all sorts of stimulus.
But then, it got worse. To boost economic output, even more money was introduced. In March 2021, our Congress passed a $2.1 trillion stimulus bill for just this purpose. However, lawmakers didn’t anticipate the savings boom as people worked from home.
Individual savings exploded. At one point, the number jumped to a record 32%, according to the U.S. Bureau of Economic Analysis. And after a brief pullback, that same number shot back up to 26%. Those rates haven’t been seen before or since.
Now, all that cash was intended for things like mortgage payments and rent. But people had other ideas. They bought televisions, cars, and whatever they could get their hands on. This caused the U.S. Bureau of Labor Statistics’ consumer price index (“CPI”) to shoot up to 9.1%, the highest level in over four decades.
But it wasn’t just a U.S. based phenomenon. It happened everywhere. Look at this chart of inflation growth in the U.S., Europe, England, and Japan, to see what I’m talking about…
On the left side of the chart, you see inflation growth in these nations is troughing not long after the pandemic, in late 2020/early 2021. Then as stimulus efforts build, inflation takes off. In the middle of the chart, you’ll notice CPI growth starts to peak in mid-2022.
That’s due to the aggressive rate hikes done by the Bank of England (“BOE”), ECB, and the Fed.
On the left side of the above chart, you see interest rates started rising in early 2022. That was several months before inflation growth peaked. And then as we move further out in 2022 and into 2023, we see policy tightening gets more aggressive.
But if we reference our CPI chart, we notice something else is happening… as rates go up rapidly, inflation rolls over. The further we move right on the graph, inflation keeps falling. In fact, by the time the BOE, ECB, and Fed finally stop raising rates, CPI growth in each of those economic regions has been cut in half from the peaks.
Taking it one step more, let’s go back and look at the right side of each chart. In our CPI example, we notice inflation growth in England, Europe, and the U.S. is now around 2.5%. Those are the lowest levels since early 2021 and close to the global central bank target of roughly 2%. As a result, interest rates have started to drop.
So now, let’s look at what’s happening in other parts of the world.
I chose Canada, Sweden, and Switzerland. It’s not that any of them are inconsequential, but if you ask someone to name a major economy, I’ll bet none of those nations come up. In terms of central banks, the Bank of Canada might have a shot, but the Swiss National Bank and Riksbank are afterthoughts.
Yet, according to the World Bank. Canada makes up 2.1% of global GDP, Switzerland almost 1% and Sweden 0.6%. That makes them the world’s ninth, twentieth, and twenty-third largest economies. In other words, they control a lot of spending power.
Look at this chart of inflation growth in those three nations.
It looks a lot like the earlier example…. Inflation took off in 2021… peaked in 2022… and now, it’s at or below the global 2% target.
As a result, they’re all starting to slash interest rates…
The above chart shows us the Bank of Canada, the Riksbank, and the Swiss National Bank, have all lowered rates three times this year. In addition, they’ve all said inflation growth is slowing more rapidly than anticipated, so they’re prepared to cut even more.
Here’s why it matters.
Like I said above, none of these are economies that come to the front of people’s minds. However, they’re some of the most important in the world. So, the spending power of their citizens is important to global growth. And, at the same time, the investing power of those same people is equally important to global markets.
If each of these central banks has already cut rates three times and it tends to cut more, that means one thing…. the cost to borrow money in each of those nations is getting cheaper. That means fund managers and individual investors in those countries will be more willing to leverage up and take risks.
As those institutions and individuals look for compelling returns, they’ll inevitably turn to cryptocurrencies. U.S. markets will be a popular destination for many of those funds given the economic growth picture and technology revolution that’s taking place. And all that money is put to work, it should underpin a steady rally in cryptocurrencies like bitcoin and ethereum.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
