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 isnât much different. Fund, managers, stock pickers, traders, you name it, all have areas where theyâre 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 whatâs 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 whatâs happening at home with our economy and the Federal Reserve. Or, if they branch out, theyâll consider whatâs happening in Europe and the European Central Bank (âECBâ).
But many times, investors on Wall Street and Main Street pay little heed to whatâs happening in economies outside of those regions. Consequently, they pay even less attention to whatâs happening at central banks outside of the majors. I get it, the U.S. and Europe (in aggregate) make up the worldâs two largest economies.
Well, right now, based on what Iâm seeing, those policymakers outside of the major economic centers are becoming more accommodative. In other words, itâs going to cost less to borrow money moving forward. That means global liquidity should improve, boosting the outlook for risk assets like cryptocurrencies.
But donât take my word for it, letâs look at what the dataâs telling usâŠ
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 didnât 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 havenât 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 Statisticsâ consumer price index (âCPIâ) to shoot up to 9.1%, the highest level in over four decades.
But it wasnât 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 Iâm talking aboutâŠ
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, youâll notice CPI growth starts to peak in mid-2022.
Thatâs due to the aggressive rate hikes done by the Bank of England (âBOEâ), 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, letâs 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, letâs look at whatâs happening in other parts of the world.
I chose Canada, Sweden, and Switzerland. Itâs not that any of them are inconsequential, but if you ask someone to name a major economy, Iâll 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 worldâs 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 exampleâŠ. Inflation took off in 2021⊠peaked in 2022⊠and now, itâs at or below the global 2% target.
As a result, theyâre all starting to slash interest ratesâŠ
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, theyâve all said inflation growth is slowing more rapidly than anticipated, so theyâre prepared to cut even more.
Hereâs why it matters.
Like I said above, none of these are economies that come to the front of peopleâs minds. However, theyâre 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 thingâŠ. 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, theyâll 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 thatâs 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.
