Rate Hike Bonanza Among Major Central Banks Hits Two-Decade Peak in September

Central Bank

Summary:

Major developed central banks delivered in September rate hikes at a pace and scale not seen in at least two decades, ramping up their fight against multi-decade high inflation with little let-up in sight.

Central banks overseeing eight of the 10 most heavily traded currencies delivered 550 basis points of rate hikes between them last month, bringing the total volume of rate hikes in 2022 from the G10 central banks to 1,850 basis points.

"For sure, central banks are focused on killing the inflation beast," said Vincent Chaigneau, head of research at Generali in a quarterly outlook.

"But inflation lags the economic cycle. The risk is that hysteresis forces in the inflation cycle keep central banks on a war path for too long, causing policy overshooting." Rate Hike Bonanza Among Major Central Banks Hits Two-Decade Peak in September_1

Rate Hike Bonanza Among Major Central Banks Hits Two-Decade Peak in September_1

Growth fears over major central banks ramping up rates too fast and potentially too far had seen markets gyrate in the third quarter and cast a pall over the month ahead.

September central bank decisions did little to soothe these fears with the Federal Reserve hiking interest rates by 75 basis points for a third straight time and chair Jerome Powell vowing to "keep at it" while the Bank of England also raised rates.

Both the European Central Bank and Canada lifted benchmark rates, while policymakers in Switzerland effectively ended a decade of negative interest rates in Europe with their rate hike in September while Sweden's central bank delivered the biggest rate increase in four decades.

There are signs though that some are looking to take the foot off the pedal. Norway predicted smaller hikes ahead after delivering a 50-bps rise on Sept. 22, while Australia, having lifted rates to seven-year highs in early September, surprised markets with a smaller-than-expected move in October, the first bank out of the starting block in the fourth quarter.

Across emerging markets, signs of the rate hike cycle coming to an end were more prominent. Ten out of 18 central banks delivered 600 bps of rate hikes in September, well below the monthly tally of 800-plus basis points in both June and July.

Rate Hike Bonanza Among Major Central Banks Hits Two-Decade Peak in September_2

Hungary delivered a larger-than-expected 125 bps rise to end its tightening cycle in September while uber-hiker Brazil took a breather in September. Both central banks have delivered around 1,200 bps each of hikes since early 2021, emblematic of the early hiking efforts undertaken by policymakers in both emerging Europe and in Latin America, while Asia was still somewhat earlier in the cycle.

In total, emerging market central banks have raised interest rates by a total 6,340 bps year-to-date, more than double the 2,745 bps for the whole of 2021, calculations show.

"Emerging markets are way ahead of many developed markets' central banks including the Fed, the ECB and Bank of England," Claudia Calich, head of emerging markets debt at M&G Investments.

"From the rates perspective, we are towards the end of the tightening cycle."

Source: Reuters

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Kevin Du

The Saudi Central Bank (SAMA), which also acts as the kingdom's national banking regulator, recently appointed Mohsen AlZahrani to lead its virtual assets and central bank digital currency program. This hire potentially indicates a change in the country's approach to cryptocurrencies, which regulators there have tended to treat with suspicion.

In 2018, SAMA warned against trading in virtual currencies because of their "negative consequences and [the] high risks on the traders as they are out of government supervision." The central bank emphasized that cryptocurrencies, including bitcoin, "are not approved as official currencies in the kingdom and no parties or individuals are licensed for such practices by regulators in the kingdom." The regulators further noted that Saudi citizens should not pursue the "illusion" of crypto-related "get-rich schemes."

According to Mirza Mahmood ul Hasan, managing director of Fiduciam Global, a Riyadh-based consultancy firm that advises on digital transformation, the regulators have previously demonstrated an overly cautious attitude toward crypto. "Anything related to public investing or the flow of money, they will approach very, very conservatively," Hasan told Al-Monitor. "They feel that they are the ones that will protect the public, and the feeling is often that the "common man" in Saudi may not be able to exercise a lot of judgment on his own."

SAMA's positioning on cryptocurrencies may also have been influenced by religious considerations. Digital assets have been controversial in the Muslim world. Because of the high degrees of volatility involved in crypto markets, some Islamic scholars have argued that trading crypto is effectively the same as gambling and is therefore haram. In 2017, prominent Saudi cleric Assim al-Hakeem declared that cryptos are prohibited under Islamic law because of their "ambiguity." Last year, crypto was deemed haram in the world's biggest Islamic country, Indonesia.

Given all of this, what might have caused SAMA to consider a change in approach?

There is firstly the reality on the ground. Despite there being no legal means of buying crypto in Saudi Arabia, there has nonetheless been a proliferation in the number of citizens trading digital assets in the kingdom. According to research published in May by KuCoin, a global crypto exchange, around 3 million Saudis "have become crypto investors who either currently own cryptocurrencies or have traded over the past six months." This accounts for 14% of the adult population aged between 18 and 60. KuCoin also claimed that a further 17% of adults are "crypto-curious and are likely to invest in cryptocurrencies over the coming six months."

Hasan believes this may have prompted a recognition from the regulators that "it's very difficult to stay away from this."

"You cannot control this financial evolution. It will evolve everywhere in the world," he argued. This is perhaps especially true in Saudi Arabia, where 70% of the population is under 30 and where attitudes on a wide range of subjects are liberalizing. The job of AlZahrani at SAMA is likely to involve considering regulations that will protect consumers — and offer the authorities at least some control over crypto markets — while accepting that innovation in this space will continue to take place.

Furthermore, there has long been interest from both public and private enterprises in Saudi Arabia in the potential of blockchain. This is the technology that underpins crypto, a public and transparent database that records transactions between different entities. While there is a strong association between blockchain and cryptocurrencies, the technology can also be used in non-crypto contexts.

Indeed, this type of use has increased significantly in the kingdom. For example, blockchain solutions have helped halal companies trace the source of ingredients and ensure the relevant standards are met. Major corporations like Aramco have also invested in developing the technology. Aramco has adopted blockchain as a way "to integrate thousands of sensors at oil fields and refineries to check performance."

Because of the increasing number of use-cases, Hasan says that "there is a massive amount of interest in blockchain," and this in turn is driving wider interest in crypto. He told Al-Monitor that SAMA may believe that "you have to use a cryptocurrency" in order to take full advantage of "fintech and blockchain solutions."

Some observers have also noted that the kingdom's shift may be influenced by the success of the neighboring United Arab Emirates. The UAE has offered a favorable regulatory environment for digital assets companies and granted licenses for many of the global exchanges to operate in the emirates. This has seen both Dubai and Abu Dhabi emerge as global crypto hubs.

Abdulla Al Ameri, a crypto specialist who founded a blockchain-focused venture capital fund in the UAE, believes that Saudi Arabia has been inspired by his country's success. He said that the "UAE is showing Saudi [Arabia] how to bring investment in," and this has prompted SAMA to consider "regulating the crypto markets."

While some have described Saudi Arabia and the UAE as "rival allies" in the trade and investment sphere, Ameri believes that when it comes to crypto, "There are a lot of synergies and a lot of things happening between Saudi [Arabia] and the UAE that complement each other." He pointed to the fact that the UAE and Saudi Arabian central banks have agreed to launch a joint cross-border cryptocurrency as evidence that the two countries are "brothers," at least in this area.

Hasan suspects the motivations may be rather different, however. He said Saudi Arabia's "unofficial goal" is "to surpass the UAE in almost everything." He argued that this is true "even with the tourism that [the government] has been banking on — if you look at what's happening in NEOM and the Red Sea, the agenda is very, very clear." He was hopeful that this rivalry with the UAE "is what is going to bring about changes."

Although Saudi Arabia is by far the biggest economy in the Middle East, it is unlikely to displace the UAE as the region's crypto hub anytime soon. As Ameri noted, "The UAE is much more advanced and is the first to enter the market," and has already attracted global crypto exchanges to establish headquarters in the country. Hasan also argued that despite the apparent change in approach from the kingdom, "It will always take a fair amount of time to actually translate into any shifts in the environment."

Source: Al-Monitor

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Thomas

The crude oil price had touched 130 dollars a barrel earlier this year. It fell later and went below $85 per barrel in September. But now OPEC+, the oil-producing group, has decided to decrease oil production, which means oil prices may increase from the current levels. An increase in crude oil prices is never good for the Indian economy.

What is the current oil price?

Oil prices jumped nearly extended gains on Tuesday, as OPEC+ considered reducing output by more than 1 million barrels per day (bpd) to support falling prices, with its biggest cut since the start of the COVID-19 pandemic. The demand for oil has fallen amid concerns of recession across the world. Let us look at how oil prices and the Indian economy are linked. Brent crude futures for December delivery rose $3.72 to $88.86 a barrel, a 4.4% gain. U.S. West Texas Intermediate crude rose $4.14, or 5.2%, to $83.63 a barrel.

Oil Prices and the Indian Economy

The Indian economy is impacted both directly and indirectly by rising oil prices. Below are the impacts of rising crude oil prices on the Indian economy:

Current Account Deficit: India imports more than 86% of its oil requirement. With the rise in crude oil prices, India's import bill will increase, and hence the CAD will widen (difference between import and export). As per ICRA, for every $10 per barrel increase in the price of the Indian crude oil basket, the CAD could widen by $14-$15 billion, or 0.4% of GDP.

Rupee exchange rate: The value of a free currency like the rupee depends on its demand in the currency market. This is why it depends to a great extent on the current account deficit (CAD). A high deficit means the country has to sell rupees and buy dollars to pay its bills. It reduces the value of the rupee - a falling rupee is never good for the economy (except for some sectors).

Rise In Inflation: International Energy Agency has said that a 10% increase in crude oil prices in India will lead to an increase in the Wholesale Price Index (WPI) by nearly 0.9%. There is also a significant impact on the consumer price index (CPI) with increasing crude oil prices. Hence, inflation increases with a rise in crude oil prices. The RBI and the Indian government are trying hard to bring inflation below the 6% threshold, but if oil prices increase, controlling inflation won't be easy.

Fiscal deficit: It is the difference between the government's earnings through taxes (direct & indirect) and the government's expenditure. If the government decides not to pass on the crude oil price hikes to the consumer, then, they will not increase the price of petrol. But someone has to take the hit. In this case, it will be the Indian government. It will lead to a fiscal deficit, and it is never good for the economy.

Forex reserves: India had great protection against any volatility in its balance of payments because of high forex reserves. Until recently, India had forex reserves of nearly $640 billion. However, rupee depreciation (because of increasing crude oil) is depleting India's forex reserves as the RBI has to sell dollars to control rupee depreciation.

Growth concerns: With increasing crude oil prices, inflation will increase, and to control inflation, the RBI will have to increase the interest rate. It will lead to lower spending, and hence the country's growth will come down. As per estimates, a rally of $10 per barrel in the India crude basket could lead to a 10 basis point fall from the annual GDP growth estimate.

Investors should monitor the crude oil prices since it impacts the broader economy, as we have seen above. Also, some stocks are directly impacted by crude oil prices. Hence, if you see crude oil prices going up, stocks that use crude oil as a raw material may fall.

Source: IND Money

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Winkelmann

Terry Kallis cancelled development of a 6-gigawatt green hydrogen facility in South Australia in May. His Kallis Energy Investments encountered an insurmountable problem: a lack of water.

It's just one of the 680 or so large-scale hydrogen projects under consideration around the world, per the Hydrogen Council, which estimates some $700 billion of investment is needed by 2030 to hit net-zero emissions targets. Plenty of those are likely to die of thirst, too.

Large companies including BP, Fortescue Metals and Reliance Industries are leading the charge into green hydrogen, so called because it's manufactured using renewable energy rather than carbon-emitting fossil fuels. It even helped Fortescue notch up a stock-market premium to rivals. A search for mention of water in prospective producers' statements, though, tends to yield nothing. That raises concerns they're either ignoring the risks, or underestimating how much they'll need, the challenges of securing it, and how much it will cost. Kallis, at least, had taken the rare step of flagging the H20 concern from the start.

Much is riding on green hydrogen's success. From being a niche climate-change solution three or four years ago, it has morphed into something that could power everything from shipping, aviation, and large trucks to industrial processes like making steel and fertiliser. The International Renewable Energy Agency (IRENA) estimates green hydrogen could account for almost a tenth of global final energy use by 2050.

Water is one of the three key inputs for manufacturing it, along with renewable energy and the electrolyser that splits H2O into its constituent parts of hydrogen and oxygen. Trouble is, generating the required power usually means building factories either in areas where industry, agriculture and households are already heavily competing for the resource, or in hot, sun-drenched regions suitable for solar panels. Estimates on how much water is needed to make green hydrogen vary wildly. That's problematic as some 85% of planned facilities are in regions suffering from medium to high water stress, per consultancy Bluefield Research.

Stuck On Stoichiometry

The International Energy Agency, the Australian government's National Hydrogen Roadmap, Goldman Sachs and others state that it takes nine to 10 litres of water to create one kg of hydrogen. That only accounts for the final stage when water's two elements are split, known as the stoichiometric process. Getting to that point requires a larger amount of water. Yet more is needed to keep the electrolyser cool.

All in, Bluefield reckons that could take the total to 24 litres. Engineering consulting firm GHD puts it between 60 litres and 95 litres per kg for freshwater. Yarra Valley Water, a Melbourne utility that unveiled a green hydrogen pilot programme last month, pegs the upper end for the industry as a whole at some 80 litres.

Another source of water is desalination, which involves removing salt from seawater, but it is more water intensive. It also adds extra construction and maintenance costs, including for the vast amounts of brine produced, and approvals for such facilities, if granted, can take years.

Saudi Arabia intends to use it to produce green hydrogen — and drinking water — at its planned NEOM city on the Red Sea. and Norwegian fertiliser maker Yara International confirmed to Breakingviews they are considering using treated seawater in their plants in Western Australia, without disclosing how much they will need. Another option is using wastewater. BP is mulling that for another of its projects Down Under. Yarra Valley Water will tap its treatment plant for its new operation.

Expensive Oversight

Miscalculating water needs will, at worst, leave green hydrogen projects high and dry. For others, it will impact the estimated cost of production. Technological advances in renewables and electrolysers should reduce the outlay from the current average of around $5 per kg. The U.S. Inflation Reduction Act's tax breaks could lop up to $3 off that almost immediately; others, including Reliance Industries boss Mukesh Ambani, reckon it could drop to just $1 by the end of the decade without incentives. Because water is routinely under-priced, IRENA and others estimate it'll account for at most 2% of production expenses, even with desalination.

If such assumptions are based on needing nine litres of water per kg, there's a shock coming. Bump it up to 300 litres — the midpoint of GHD's range for seawater needed — and that's as much as 60 cents per kg for desalination alone, Breakingviews calculates using data cited by University of Delaware researchers. Trouble is, much of this is educated guesswork: prospective producers contacted by Breakingviews would not provide any numbers.

It wouldn't be the first time that big companies suffer from water blindness. It caused delays to Tesla's Berlin factory even though boss Elon Musk laughed off concerns, and forced Barrick Gold to write off $7.5 billion on one South American mine.

The imperative for decarbonisation may yet outweigh concerns over the cost, if not the availability, of water. Stakeholders, financial and otherwise, need to have all the relevant information to make that call, though. A campaign for transparency about green hydrogen's water needs would be an ideal one to be championed by the Valuing Water Finance Initiative launched by 64 money-management firms in August. It could help others like Kallis to avoid pouring money down the drain.

Source: Reuters

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FastBull Featured

Remarks of Officials

San Francisco Fed President Mary Daly said in a speech on Oct. 4 that interest rates need to continue to be raised, keeping policy unchanged until inflation is actually reduced, after which it will remain at a restrictive level for some time.

Judging by long-term price expectations, inflation has not actually become entrenched in the U.S. public, and to prevent it from becoming entrenched will require the Fed to "follow through on its commitment to lowering inflation, which means raising rates further and keeping this restrictive policy in place until we actually achieve getting inflation back down to the target."

"Our path to a soft landing is narrow, but not impossible, and there is plenty of room to slow labor market growth before we fall into the severe recessionary environment predicted by some people."

The Fed is expected to be able to slow economic growth and the labor market. This will lead to increased unemployment, and a rise in the unemployment rate to 4.5% would be the appropriate range.

"We can not be complacent, there is still a lot of room to use tools to reduce inflation; without price stability, the economy can not reach its full potential."

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Damon

The Asia-Pacific is a ticking time-bomb. Some may even want it to tick faster. And no one seems to be in any hurry to avert likely disaster. Not the United Nations (UN), resolved at birth "to save succeeding generations from the scourge of war". Nor the Asean Regional Forum (ARF), conceived to preserve and enhance the region's peace and prosperity, including through efforts to resolve conflict.

The region is now more fragmented, militarised and polarised than ever as a resurgent China is perceived as a threat by the US and its allies. Contending regional economic blocs have emerged, security groupings consisting of the US and her allies have increased and arms expenditures have spiked.

China's expansive claims and militarisation of the South China Sea have caused apprehensions among the international community. Its assertive behaviour with respect to disputed territories in the South and East China Seas has raised serious concerns among the affected states, including Malaysia.

Sanctions and a perceived common threat from the West have succeeded in driving China and Russia closer together, though China has reservations regarding Russia's invasion of Ukraine.

Frustrated at the lack of meaningful engagement with the US, North Korea passed a law in September that declared its nuclear weapon status "irreversible". The law also prohibits further talks with the US on denuclearisation, though Pyongyang will no doubt respond when it considers conditions appropriate.

The region edged closest towards conflict earlier in August when China conducted intensive military drills around Taiwan as a reaction to what it deemed was a deliberately provocative visit to the island by US House of Representatives Speaker Nancy Pelosi.

The potential for conflict and war between the China and the US and its allies remains as provocations and reactions continue to destabilise the region.

The latest aggravation is the passing of the draft Taiwan Policy Act by the US Senate Foreign Relations Committee. It is set to be tabled soon at the US Senate and House. The Act proposes to designate Taiwan a "major non-Nato ally" and enhances US political, economic and military ties with the island. The proposed Act further compromises US observance of the one-China policy.

War in the Pacific could well be far more disastrous in its consequences than the war in Ukraine. It will directly engage the military forces of several major powers, impact gravely on some of the world's largest economies, unhinge the world's busiest trading routes and supply chains, and wreak extensive environmental damage.

Above all, millions of people could be displaced or perish. The humanitarian cost can be colossal. The entire region and the world, already reeling under the effects of the Covid pandemic and the war in Ukraine, will suffer from the fallout. Restoring order, peace and growth will be a mammoth task.

War and turmoil on both sides of the Eurasian landmass will bring mankind the closest to yet another horrendous World War three-quarters of a century after the last.

With the World Bank raising the possibility of a global economic recession next year and the worsening environmental and climate conditions around the globe, it looks like a perfect storm is brewing.

The danger is clear and it is present. Concerted action is required to prevent the region from sliding further towards disaster. The two institutions that are perhaps best to shepherd this effort are the UN and Asean. Despite their acknowledged weaknesses, they possess some of the qualities necessary for the role. Working in support of each other, there is much that can be achieved.

The UN has to make its presence felt in the region, as much as it has with respect to the turmoil in Ukraine. Secretary General Antonio Guterres is the voice of the international community. He can bring to bear the tools that are available to the organisation, including the UN General Assembly, to persuade the major powers.

Asean is recognised as a neutral and non-aligned organisation that is dedicated to the promotion of peace and stability through dialogue and cooperation. Importantly, it anchors the ARF, which includes among its participants all the major powers as well as the other countries in the Indo-Asia-Pacific region.

The fundamental challenge before the UN and Asean is to help the region navigate peacefully from a unipolar world centred in the US and the West for the last three hundred years to a more multipolar geo-economic order in which wealth at the top is shared with several Asian and other emerging economies.as well.

This overarching geopolitical issue colours and aggravates virtually every other security problem in the region. They include the three flashpoints of likely conflict, namely the cross-Strait issue, the situation on the Korean Peninsula, and the disputes in the South and East China Seas.

Uppermost is the need to prevail upon the major powers and the immediate countries involved to abide by international law and recognised international norms as they pursue their respective interests. The region will be a much more peaceful place if they do.

The Taiwan issue is the most urgent to address. China and the Taiwan authorities should continue with earnest peaceful negotiations. Third parties should assist both Beijing and Taipei in this matter, instead of stoking sentiment and taking actions that aggravate the situation.

They should abide by the one-China principle and avoid taking sides. They should cease conducting naval patrols in the Taiwan Strait and holding joint military exercises in the vicinity. They should stop making statements attacking either side. This will greatly assist to lower tensions and foster an atmosphere more conducive to peaceful negotiations.

Source: the edge markets

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Remarks of Officials

Federal Reserve Governor Philip Jefferson (Philip Jefferson) said in a speech on October 4: Reducing high inflation is the Fed's top priority, for which it may take some time for economic growth to weaken. Monetary policy takes time to fully impact, and in my brief time on the Federal Open Market Committee, the Fed has acted boldly to address rising inflation, and we are committed to taking further necessary steps.

Jefferson said high inflation in the U.S. is his biggest concern, and he worries that while oil and gasoline prices have come down in recent months, fluctuations in prices of the goods to which people pay the most attention, like food and housing, will affect expectations of future inflation.

With still-strong labor demand and sluggish labor supply, the job market remains very tight. Workers are moving between jobs more rapidly than in the past, putting upward pressure on wages. In a market with more job openings than workers, the competition to fill vacancies is leading to rapid wage gains now, and the resulting salary compression may lead to further upward wage pressures in the future.

This is Jefferson's first public speech since he became a Fed governor (with permanent voting rights during his term) in May this year. The day before Jefferson's speech (October 3), the Fed's third in command, New York Fed President Williams likewise said that it would take time to reduce high inflation, arguing that the Fed's fight against hyperinflation has not been a great success, monetary policy has not yet had a limiting impact on the economy.