As Covid strikes back, what will Governments and Central Banks do?

We've already seen the world's governments and central banks react to covid once. Since then, the world has gradually returned to normal (most places) and we've seen most central banks present a likely path for the interest rates to return to where they were prior to the pandemic. Similarly, governments have presented their plans for a steady reopening of their societies (here in Norway, we've had 0 restrictions of any kind since (September 25.)

Now, however, with new fears surrounding omicron and impactful restrictions/lockdowns being proposed yet again, will those plans be forced to change? And how will that impact the stock markets and our favourite cryptos?

Let's have a look!

How will it affect short-mid term interest rates?

Many of the Western central Banks have over the past few months presented plans to raise the interest rates from their record lows following a return to normal for the economy. Here in Norway, the interest rate went down to 0% (all the way down from 1.5%) for the first time ever in spring last year following the first rounds of restrictions to handle the first wave of covid. Since then, employment is back to where it was before the pandemic hit and economic growth is as high as ever with net export setting record levels.

As a result, the messaging has been strong, that following a first raise of 0.25% that we had in September, the bank would raise it again in December and then an additional 4 times throughout 2022. Thus bringing it back to 1.5%. My question now is whether or not they are likely to stick to the plan if travel restrictions, supply chain issues, restrictions on social events etc, are returning with the new covid variant and increased number of covid cases.

Aside from considering its goal for inflation, the central banks primarily look at household financials and economic stability. With soaring electricity prices across Europe, and an increased uncertainty for businesses, it makes a good case for the central bank to be more reluctant to raise the interest rates back up as quickly as intended. Thus, the recent events have made it more likely that interest rates will stay low for longer than previously thought.

So what about governments?

Is there any more fuel left in the stimulus tank?
Most countries have already seen their governments go through a spending spree of stimulus packages in order to do damage control for their own response policies and restrictions made to covid. An obvious question then should be whether or not they've reached their limit, or if there are still cards left to be played?

I deem it unlikely that governments will want to spend nearly as much money on stimulus and relief packages this time around. One reason is the aftermath results we now have from 2020, where most companies receiving stimulus "in order to not risk going out of business and needing to let go of employees", instead had record results and provided record high dividends to their private shareholders. I find it unlikely, that governments will want to hand out nearly as much when companies have both demonstrated not needing it in the first place, while now also being much better prepared to handle remote work and the new reality presented by covid. A second reason is simply that most have already passed the bills they were looking for anyways, and will face an increased battle to get done more.

In short, I think the most likely outcome is that interest rates will stay low longer, stimulus bills will be far fewer, but some new restrictions and/or lockdowns are likely to return short-term.

What will it mean for Bitcoin and Crypto?

As much as I'm sure we all now hate the responses from central authorities to covid, ironically it is likely to benefit Bitcoin and crypto. Facing more market uncertainty and restrictions, central banks are likely going to be slower at raising the interest rates back up again. Alongside "green companies" (who tend to have a debt position to finance growth), crypto-projects are likely to benefit from this as people look for anti-inflation stores of value. Similarly, more stimulus policies are also likely to add more fuel to the Bitcoin bull-fire.

It remains to be seen how the stock markets deals with omicron. One possibility is that more restrictions and supply chain issues, combined with less governmental stimulus as there's not as those limits have already been reached, can cause for a brutal correction this time around. In such an event, I expect a lot of money to flow out of Bitcoin (despite it arguably being a good store of value in such an event) in order to diversify more into other declining parts of a standard portfolio. Another perhaps more likely scenario is that the markets stay more flat as companies have had the ability to adapt to a life with covid, and can do somewhat fine despite it.

In any case, I think the case for Bitcoin and decentralized alternatives will continue to grow stronger as the centralized bodies continue to fail and as people look for alternatives.

Or what do you think?