SWIFT Sets Out Blueprint for Central Bank Digital Currency Network

Summary:

Financial messaging system SWIFT has laid out its blueprint for a global central bank digital currency (CBDC) network following an 8-month experiment on different technologies and currencies.

The trial, which involved France and Germany's national central banks as well as global lenders like HSBC, Standard Chartered and UBS, looked at how CBDCs could be used internationally and even converted into fiat money if needed.

Around 90% of the world's central banks are now using, trialling or looking into CBDCs. Most don't want to be left behind by bitcoin and other cryptocurrencies, but are grappling with technological complexities.

SWIFT's head of innovation Nick Kerigan said its trial, which will be followed by more advanced testing over the next year, resembled a bicycle wheel where 14 central and commercial banks in total connected spoke-like into its main hub.

The idea is that once scaled-up, banks may need only one main global connection, rather than thousands if they were to set up connections with each counterpart individually.

"We believe that the number of connections needed is much fewer," Kerigan said. "Therefore, you are likely to have fewer breaks (in the chain) and you are likely to achieve greater efficiency."

The trial also tested different underlying CBDC technologies known as Distributed Ledger Technologies. The use of various technologies has also been raised as a potential hurdle for rapid global adoption.

There was a separate trial too carried out alongside Citi, clearing house Clearstream and Northern Trust on 'tokenised' assets - traditional assets like stocks and bonds transformed into digital tokens that can then be issued and traded in real-time.

Some countries such as the Bahamas and Nigeria already have CBDC's up and running. China is well advanced with real-life trials of an e-yuan, while central bank umbrella group, the Bank for International Settlements, has also been running cross-border trials.

SWIFT's main advantage though is that its existing network is already usable in over 200 countries and connects more than 11,500 banks and funds.

The Belgium-based firm has gone from being virtually unknown outside banking circles to a household name this year after it cut most of Russia's banks off from its network as part of the West's sanctions for the country's invasion of Ukraine.

Kerigan said that kind of move could also happen in a new CBDC system, but doubted whether it would stop countries joining one.

"Ultimately what most central banks are looking to do is to provide us with a CBDC for the people, the businesses and the organisations in their jurisdiction."

"So a solution that's fast and efficient and that gains access to as many other countries as possible would seem to be an attractive one."

Source: Reuters

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Alex

Central Bank

Singapore is likely to tighten monetary policy this month, the fifth time in a row, amid persistent inflation in the Asian financial hub due to global supply chain disruptions and a tight labour market.

All 16 economists polled by Reuters forecast the Monetary Authority of Singapore (MAS) to tighten its policy, but they are divided on how aggressive the central bank is likely to be and which of its various settings it will change.

Instead of interest rates, the MAS manages policy by letting the local dollar rise or fall against the currencies of its main trading partners within an undisclosed band, known as the Singapore dollar Nominal Effective Exchange Rate, or S$NEER.

It adjusts its policy via three levers: the slope, mid-point and width of the policy band.

Economists are split on whether MAS will tighten one or two of its three settings.

Those betting on only one lever largely cited the weak economic outlook.

Four analysts said the MAS would lift the mid-point, with no change to the width or the slope while another five expect the MAS to steepen the slope only.

Adjusting the mid-point is typically seen as a more "aggressive" tool than adjusting the slope, while the width is usually used to limit Singapore dollar volatility.

"Recentering of the midpoint helps to deal with short-term macro pressure more immediately, whilst steepening the S$NEER slope has historically been associated with a more upbeat macro-outlook," said Morgan Stanley analysts in a report.

"Singapore's small, open economy and high export orientation mean that it is most exposed in Asia to a global demand slowdown...the balance of concern is likely to shift from upside risks to inflation to downside risks to growth as we head into 2023," they added.

The remaining seven analysts expect MAS to both steepen the slope and upwardly recentre the mid-point.

"MAS faces a worse growth-inflation tradeoff (in this October) than when it delivered an upward recentering of the S$NEER policy band in an off-cycle move in July," said Bank of America Securities' economist Mohamed Faiz Nagutha.

The central bank is expected to release its next semi-annual monetary policy statement no later than Oct. 14.

The MAS has tightened monetary policy four times in a row, with the latest in July in an out-of-cycle move.

Core consumer inflation hit a near 14-year high in August due to larger increases in the prices of services and food, while headline prices also beat analysts' forecast.

The MAS projects core inflation this year to be between 3% and 4%, while headline inflation is expected to be between 5% and 6%. Analysts expect the MAS to upwardly revise its inflation forecast at the October meeting.

The government had projected gross domestic product to expand 3-4% in 2022.

Singapore has removed most of its COVID-19 curbs with high-profile international conferences and events returning to the city-state in recent months.

Source: Reuters

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Owen Li

Central Bank

Thailand's headline inflation rate was less than expected in September, decelerating from the previous month, data showed on Wednesday, but above-target consumer prices reinforced expectations of a further interest rate hike in November.

The headline consumer price index (CPI) rose 6.41% in September from a year earlier, helped by easing energy prices and last year's low base, and down from August's 7.86% increase, which was a 14-year high, according to commerce ministry data.

The reading compared with a forecast rise of 6.60% in a Reuters poll, and the central bank's target range of 1% to 3% for headline inflation.

The core CPI index, which strips out energy and fresh food prices, was up 3.12% in September from a year ago, also less than a forecast rise of 3.20%, and followed August's 3.15% rise.

Inflation may fall further in the fourth quarter of this year due mainly due to government support measures for energy and food prices, the ministry said.

It forecast headline inflation to average between 5.5% and 6.5% this year.

Thai Inflation Rate Slows In September, C.Bank Seen Hiking Further_1

The Bank of Thailand will adopt a gradual and measured approach to bring inflation back to target, according to Governor Sethaput Suthiwartnarueput.

Last week, the Bank of Thailand raised its key interest rate by a quarter point to 1.00% to contain inflation. It will next review the rate on Nov. 30, when most economists expect a further, gradual hike.

The BOT predicts average headline inflation of 6.3% this year before falling to 2.6% next year. It forecasts the core rate at 2.6% this year and 2.4% next year.

In the January-September period, headline inflation was 6.17% and the core rate was 2.26%.

Source: Reuters

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Damon

"Never let a good crisis go to waste," Winston Churchill once said — and many international investors may be wondering if they should heed the late wartime prime minister's words and take advantage of the financial crisis that threatens to engulf the UK.

The country is in an economic mess. Worse, it is largely self-inflicted, as new Prime Minister Liz Truss makes a misguided start to her tenure.

On September 23, Chancellor Kwasi Kwarteng stood up to deliver a mini-budget aimed at driving the country's economy back to its long-term trend growth rate of 2.5 per cent a year.

Instead, he plunged it into chaos, destroying investor confidence, crushing the pound and almost triggering a pensions meltdown.

While Mr Kwarteng on Monday bowed to widespread pressure and scrapped the plan to abolish the 45 pence income tax rate for high earners, the mini-budget remains a nightmare for Britons and could end 12 years of Conservative rule. But is it also a buying opportunity for overseas investors?

Suddenly, UK assets are going cheap. Stock markets are down, bond prices are tumbling and Credit Suisse reckons property prices could fall by 10 per cent to 15 per cent. For those with US dollars, UK assets are already more than 20 per cent cheaper, in currency terms as the greenback soars.

So what's gone wrong and how bad — or good, depending on your perspective — can things get?

Mr Kwarteng's "fiscal event", as he labelled it, was a masterpiece of bad timing.

Ms Truss had just announced an energy bills support package that could cost a staggering £150 billion ($168.1bn), which will be added to the nation's debt rather than funded by a windfall tax on oil and gas companies.

The last thing international investors needed to hear was that the UK was going to borrow another £72bn to fund tax cuts for the super-rich.

Allowing bankers to pay themselves bigger bonuses and initially scrapping 45 per cent income tax band was never going to be popular. But to launch it at a time when millions are facing the choice between eating and heating their homes was a fiasco.

The Tories are plunging in the polls, but the real threat comes as international investors vote with their feet.

The UK is unusual as it relies on overseas buyers to finance almost half of its government debt, to the tune of about £70bn a year. Former Bank of England governor Mark Carney once called it "relying on the kindness of strangers".

Ms Truss and Mr Kwarteng have abused that kindness, with foreigners reluctant to buy government debt from a country whose leaders appeared to have lost all fiscal sense.

Last Wednesday, yields on 30-year UK government bonds, known as gilts, soared from 3.6 per cent to almost 5.2 per cent as investors demanded a higher return. One year ago, 30-year gilts yielded just 1.33 per cent.

When bond yields rise, bond prices fall. This almost smashed the nation's £1.5 trillion workplace pensions system, as trustees found their bond holdings no longer matched their liabilities and had to sell them in a panic to raise cash.

BoE governor Andrew Bailey stepped into prevent ruinous financial contagion with a pledge to buy £65bn of his own gilts.

The central bank's intervention has given embattled buyers a reason to step back into the market, says Chris Beauchamp, chief market analyst at online trading platform IG. "This might mark the low for now in risk assets."

The pound has recovered slightly. After threatening to fall to parity with the US dollar, it has crept above $1.11. Gilt yields are below 4 per cent.

An uneasy peace holds but after the recent wave of selling, there's hope for a bounce in the short-term, Mr Beauchamp says.

However, "this doesn't change the bleaker medium-term view", he adds.

Perhaps surprisingly, London's benchmark FTSE 100 index has not done that badly this year, falling "just" 7.56 per cent. That is dwarfed by the 24.1 per cent drop on the US S&P 500. Is Now the Time to Invest in UK Stocks and Property?_1

Is Now the Time to Invest in UK Stocks and Property?_1

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The FTSE 100 is packed with banking, energy, consumer staples and healthcare stocks that hold up well in times of weak growth and high inflation, says Jason Hollands, managing director of Bestinvest.

"It has low exposure to growth sectors like technology, communications and consumer discretionary businesses, which have sold off this year," Mr Hollands says.

Companies listed on the index generate three quarters of their earnings overseas, so actually benefit from a weaker pound, as this boosts the value of those revenues once converted back into a weaker sterling.

The FTSE 100 also offers attractive dividends, currently yielding 4.1 per cent a year against 1.69 per cent on the S&P 500. It is much cheaper than the US, trading at 14 times earnings against around 27 times.

Nobody expects the FTSE 100 to take off like a rocket but it does have its attractions, says Victoria Scholar, head of investment at Interactive Investor. "It offers steady growth and income prospects for long-term investors."

As with all UK assets, it is also cheaper for dollar buyers, as the pound has fallen an incredible 21.11 per cent against the greenback.

Sterling is not the only currency on the rack. The euro is down 15.74 per cent against the dollar year-to-date, while the Japanese yen has fallen 25.43 per cent against the greenback.

If you earn dollars or dollar-pegged currencies such as the UAE dirham, everywhere is cheap at the moment.

A more exciting question is whether now is the time to buy UK property.

The UK property market has been astonishingly resilient, with prices rising another 11.5 per cent in the 12 months to August despite this year's woes.

That may change as the mortgage market is in disarray. When gilt yields rocketed, lenders pulled more than 3,000 fixed-rate deals, which were suddenly impossible to price.

Markets expect the BoE to hike base lending rates from today's 2.25 per cent to 6 per cent, to save the pound and curb inflation.

That would add £7,500 a year to the cost of servicing a £200,000 variable rate mortgage, at a time when millions are struggling to financially cover food and fuel costs. Many will be forced to sell their homes, but could find buyers in short supply.

As mortgage rates rocket and choice shrinks, the market is under pressure, says Tomer Aboody, director of property finance lender MT Finance. "We are seeing a shift in sentiment and the move to a buyers' market. Sellers no longer call the shots."

Buying UK property is also slightly cheaper, as Mr Kwarteng cut stamp duty in his mini-budget, saving buyers up to £2,500.

But those expecting to bag a prime bargain may be disappointed, Mr Aboody says. "Prime properties, especially within the London area, should sustain values as foreign buyers take advantage of the weaker pound."

Anybody buying UK assets today must brace themselves for further volatility, says Joshua Raymond of currency broker XTB. "The Bank of England is applying plasters on the financial wounds created by the Truss government."

The central bank's £64bn intervention only lasts until October 14. If Ms Truss and Mr Kwarteng have not relented by then, the crisis could intensify.

Global investors will not want to let today's crisis go to waste but nor should they rush in either.

This could have a lot further to run and if it does, buyers could find even bigger bargains in the months ahead, especially in the nation's property market.

Source: thenationalnews

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Jason

Central Bank

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.