Disinflation and Its Impact on Central Banks and Bitcoin Price

Introduction

In recent years, the global economy has been experiencing a trend of disinflation, with decreasing inflation rates observed in the United States and China. This article aims to explore whether the decline in inflation is sufficient for central banks to halt their campaigns of interest rate hikes and consider the potential impact on the price of Bitcoin.

When Will Interest Rate Hikes Cease?

The graph above illustrates the declining trend in global inflation. However, despite this trend, central banks continue to raise interest rates. In the past month, the Federal Reserve of the United States increased interest rates by 0.25 percent, bringing the current range to 5.25 to 5.50 percent.

This move marks the highest level of interest rates in 22 years. Initially, central bankers believed that inflation was a temporary phenomenon and refrained from taking immediate action during the COVID-19 pandemic.

It soon became evident that inflation was not as temporary as anticipated, prompting central banks to respond aggressively to curb inflation. Given the recent interest rate hikes despite evident declining inflation, central banks are now exercising caution. They are hesitant to prematurely declare victory over inflation, considering their earlier miscalculations during the pandemic.

The Federal Reserve has also indicated its intention to maintain the elevated interest rates for an extended period. However, this could potentially lead them to overshoot their target. Some analysts even warn of deflation, and a recession remains a possibility.

Impact on the Price of Bitcoin

Currently, it is challenging to accurately assess the exact impact of central banks’ interest rate policies on the price of Bitcoin. In 2022, significant market downturns were witnessed following the initiation of the interest rate campaigns. Subsequently, the market stabilized, and Bitcoin performed exceptionally well in 2023.

However, at present, there is a slowdown in bullish momentum, evident by the struggle to push the Bitcoin price above $30,000. Despite positive news regarding the potential approval of the BlackRock Spot Bitcoin ETF and the upcoming halving scheduled for April 2024, the bullish sentiment appears to have waned.

Macro-economic conditions likely contribute to this situation. Investors can currently earn a risk-free return of 5 percent on US Treasury bonds. It is therefore reasonable for an increasing number of investors to choose this risk-free return over assets such as stocks and Bitcoin, both of which experienced significant growth in 2023. Additionally, there is a substantial chance of a recession in 2023/2024.

Considering the coming months, the likelihood of a bullish market for Bitcoin appears relatively low. However, this could change with unexpected news such as the approval of the US Spot Bitcoin ETF or other exceptionally positive developments (e.g., a MicroStrategy 2.0 announcement).

Once the US central bank starts lowering interest rates in 2024 to prevent a recession or disinflation, cautious bullish sentiment may return.