Central banks are planning to reduce their balance sheets by $410 billion for the rest of 2022 to deal with the worsening situation. inflation, The downside of this move could be the crypto markets experiencing a drop in prices as they grapple with the new realities of monetary policy.
Analysts at Bloomberg Economics have highlighted a pattern among Group of Seven (G7) countries to tighten their monetary policies. The report said that central banks are reducing their balance sheets and raising interest rates.
In the past, the US Federal Reserve alone reduced its balance sheets, but this time around, other central banks are likely to follow suit.
The Bank of England (BoE) has started reducing its holdings with the prospect of a hike in interest rates this month. And the Bank of Canada and the European Central Bank have unveiled a timeline for beginning quantitative strengthening of their financial markets.
Last year, the G7 central banks added $2.8 trillion as part of efforts to stimulate the recovery of their economies after the effects of the COVID-19 pandemic.
However, the Consumer Price Index (CPI) climbed 7.9% in March, making it the fastest increase in annual inflation in nearly 40 years.
Monetary policy change could hurt DeFi
To counter inflation, central banks are abandoning the policy of quantitative easing but financial markets are feeling the pain of the move.
“This is a huge financial blow to the world,” said Alicia García Herrero, chief economist at Natixis. “You are already seeing the consequences of reduced dollar liquidity and decreased dollar appreciation.”
Cryptocurrency markets and DeFi are also affected by new policy moves by central banks. Bitcoin (BTC) and other cryptocurrencies are still experiencing price stagnation, despite purchases from MicroStrategy and Luna Foundation Guard. This indicates a growing connection between crypto and traditional financial markets.
Bitcoin is trading at $38,843 while the global crypto market cap stands at $1.74 trillion. According to data from DeFi Pulse, the total value locked (TVL) in DeFi projects is $75 billion, compared to a high of 87 billion in February. Experts have noted that the actions of the Fed and other central banks have “made it difficult to take risks” in the markets.