Crypto
The Influence of Central Bank Rate on the Price of Cryptocurrency
September 21, 2023
It remains a hot topic in the financial world: central banks' interest rate decisions and their impact on various markets. Cryptocurrency, and Bitcoin (BTC) in particular, do not escape this influence. Let's take a look at how recent announcements by the U.S. Federal Reserve have affected the crypto market, and Bitcoin in particular.
Central banks often use adjusting interest rates as a tool to keep inflation at low and stable levels. If inflation begins to rise, the central bank may raise interest rates to slow demand and curb price increases. A central bank's interest rate affects the overall economy and financial markets. If interest rates rise, borrowing becomes more expensive and can lead to less spending and investment. If interest rates fall, borrowing becomes cheaper and can stimulate economic growth. Lower inflation is important because it preserves the purchasing power of currency and promotes a healthy economic environment.
Looking at the influence of central bank interest rate decisions, the U.S. Federal Reserve's decision often has the most influence. Last night (Wednesday night), the U.S. Federal Reserve kept its monetary policy unchanged from the previous Federal Open Market Set Committee (FOMC). The interest rate remains between 5.25% and 5.50%. This was already expected and thus did not cause any major price fluctuations.
Jerome Powell (chairman of the Fed) did reveal in his press conference after the meeting that the central bank will implement more interest rate hikes if the economy remains stronger than expected. Since people often invest in Bitcoin and crypto in general with "extra" money, this may not be good news for Bitcoin's share price. If savers receive a higher interest rate on a savings account at relatively low risk, there will likely be less investment in Bitcoin and altcoins, potentially causing these prices to fall.
Immediately after the central bank's announcement, the price of Bitcoin (BTC) remained steady around $27,200. But it later dropped about 1% to $26,900 when Fed Chairman Jerome Powell said during a press conference that the central bank will implement more interest rate hikes if the economy remains stronger than expected.
The FOMC's next policy meeting is scheduled for early November. After today's events, market participants are counting on about a 71% chance that there will be no interest rate change at that November meeting according to CME's FedWatch tool. However, a possible increase is being taken into account, this is also in line with the information given by Powell in his press conference.
This afternoon, the Bank of England also held a meeting on their interest rate decision. The English central bank also chose to leave interest rates unchanged. It remains to be seen what this will do to the price of Bitcoin, but traditionally this has a lot less impact than announcements from the U.S. central bank.
