The Bank of England has announced an emergency rate cut to shore up the negative impact of the coronavirus epidemic. The BoE made the rate cut on Wednesday, slashing the rate by 50 basis points (bps) from 0.75% to 0.25%. Notably, this is BoE’s first rate cut since August 2016. It is also its first emergency measure since the global financial crisis of 2008.
The Central bank’s lawmakers unanimously agreed that a rate cut was necessary to cushion businesses against the coronavirus outbreak. BoE will also introduce a new scheme to allow seamless lending to small local businesses.
The incumbent Governor Mark Carney told the press:
“The Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove large and sharp, but should be temporary.”
Notably, the British pound briefly plummeted following this surprise rate cut.
Flight To Safety
In the face of coronavirus-induced recession, cryptocurrencies have failed to attract smart money as investors turn to the safest assets. Many thought that with governments’ dovish policies such as overnight repo markets and rate cuts, investors would seek solace in cryptocurrencies.
Unfortunately, this has not been the case. Bitcoin’s status as a safe-haven asset has come into question during these tough times because the asset has failed to rally as global stocks nosedive on COVID-19 fears. For instance, the Dow Jones futures slumped by circa 530 points on Tuesday night and bitcoin continues to struggle below the $8K level. At press time, BTC is exchanging hand at $7,856.36 after shedding 3.02% of its value over the last 24 hours.
Experts in the crypto space have also expressed their utter surprise as bitcoin (BTC) continues acting like a risk-on asset alongside stocks instead of being a hedge. For instance, John Bollinger, the creator of the famous Bollinger bands recently opined:
“Bitcoin fell victim to the COVID-19 panic. I truly did not see that coming, I thought it might act as a safe haven asset.”
Traditional safe-haven assets like gold and bonds have been surging whilst the markets bleed, cementing their role as safe havens. According to data provided by Skew, gold has gained 8.82% year-to-date while bitcoin (BTC) is up by 7.75%. As you can see, this is a narrow margin which means that even with the brutal correction seen in the crypto markets, some investors are choosing BTC.
Interestingly, other central banks including Australia and the United States have already cut their interest rates, but bitcoin remains in the doldrums. Analysts expect the European Central Bank (ECB) and the Federal Reserve to cut their rates next.
But are these rate cuts really bullish?
Are Rate Cuts A Boon For Bitcoin Price?
While bitcoin has continued slumping following governments’ rate cuts, some crypto observers believe rate cuts bode well for the bitcoin price in the long-term. This is because interest rate cuts add liquidity to the markets. With increased liquidity, fiat currencies are at risk of losing their purchasing power as inflation kicks in. And as this happens, BTC is expected to be the biggest beneficiary.
So far, bitcoin has performed quite well especially when compared to equities, which is a good sign.
BTC isn't a safe haven (yet). I've always predicted it would decline with a big equity sell off. Frankly, I'm very surprised at how well it's held up. BTC up 7%+ on the year with equities down ~15%. We'll have to see what happens, but darn good performance for a risky asset.
— Ari Paul(@AriDavidPaul) March 9, 2020
Moreover, with less than 10,000 blocks to go until the halving, a reduction in the supply of BTC is ultra-bullish in an era where governments are flooding the economy with money.
