ABE Weekly: More work to achieve tighter regulation of crypto assets

Australian Bond Exchange Weekly Newsletter

Friday 3 March 2023

ABE Weekly 3 March 23

                     

Key Points

• Inflation is 7.8 per cent (Australia)
• The “Reserve Bank of Australia” (RBA) cash rate is 3.35 per cent (Australia)
• The “Consumer Price Index” (CPI) increased 6.4 per cent in the twelve months to January (US)
• The Federal funds rate is 4.57 per cent (US)
• The “Harmonised Index of Consumer Prices” (HICP) is 10 per cent (EU)
• The “European Central Bank” (ECB) main interest rate is 3 per cent (EU)
• The “Consumer Price Index including owner occupiers’ housing costs” (CPIH) increased 8.8 per cent in the 12 months to January 2023 (UK)
• The Bank rate is 4 per cent (UK)

 

Crypto’s technology has the potential to provide a public good through the improvement of payments 

According to the Reserve Bank of Australia (RBA), although there is still more work to be done in terms of tighter regulation of crypto assets, there is great potential in the technology behind crypto. Innovation in financial services is currently led by the private sector. However, the public sector should leverage this technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance​ (Reserve Bank of Australia, 2023)​. While the private sector pushes the boundaries of innovation, it will not ensure that transactions are safe and interoperable, even if well-regulated. Therefore having “Central Bank Digital Currencies” (CBDC) could help through their dual nature as a monetary instrument and as infrastructure essential to clear and settle transactions. Payments could be made from individual to individual through a CBDC ledger or platform and the Central Bank could ensure smart contracts are trusted. This will become a public good in our digital world.  

The Reserve Bank of Australia is collaborating with the Digital Finance Cooperative Research Centre (DFCRC) on a research project to explore the potential use cases and economic benefits of a CBDC in Australia. The project will involve a limited-scale pilot CBDC that is a real digital claim on the Reserve Bank, with selected industry participants demonstrating potential use cases. According to the DFCRC, the case proposals have been announced, and a range of criteria was considered in selecting the use cases to participate in the pilot, including their potential to provide insights into the possible benefits of a CBDC. The live pilot will take place over the coming months, and a report on the project is expected to be published around the middle of the year.  

The Australian Bond Exchange (ABE) has proposed a case for a CBDC to improve the efficiency of the corporate bond market in Australia 

Currently, corporate bonds settle on a T+2 basis, which can be inefficient and risky for investors. By using CBDC as a settlement asset, ABE aims to reduce settlement times, and counterparty risk, and enable atomic settlement of transactions. 

The pilot proposal involves ABE demonstrating the use of CBDC at various points in the lifecycle of a corporate bond, including the purchase, coupon payments, and sale. A small number of existing ABE clients will be selected to participate in the pilot, with ABE acting as principal and selling bonds to clients at the start of the pilot and buying them back at the end of the pilot. CBDC will be used as a risk-free settlement asset to enable faster settlement (T+0) of corporate bonds. 

This case has the potential to benefit individuals and SMEs who invest in corporate bonds by reducing settlement times and improving the efficiency of the market. The project will contribute to hands-on learning by the industry and will add to policymakers’ understanding of how a CBDC could benefit the Australian financial system and economy. 

Australia

Australia’s Treasurer Jim Chalmers stated that stubbornly high inflation in the country has likely peaked but remains the main economic game. Inflation is at a 7.8 per cent high, and it is expected to come back to the target range of 2-3 per cent by 2025.  

The logic behind raising interest rates is to lower the amount of money circulating in the economy so that inflation can remain on target.  There has been some talk this week about corporate profits driving inflation; however, according to the “Australian Financial Review” (AFR), “Excess profits are not to blame for inflation outbreak”; although the mining and energy sector recorded high profits, they did not increase the “Consumer Price Index” (CPI). Instead, their primary impact boosted national income and higher corporate taxes. What caused the increase in the CPI was the financial aid that helped households during the pandemic.  In fact, household incomes and savings were boosted by $300 billion in budget support.

The excess demand generated by people being at home with more money to spend and nowhere to go was redirected to consuming durable goods rather than services, creating bottlenecks in supply chains and ultimately increasing inflation.  

Regarding interest rates, the cash rate is 3.35 per cent as of 8 February 2023.  A review of the RBA is expected by the end of March to be handed to Treasurer Jim Chalmers.

United States (US)

The Federal Funds rate is 4.57 per cent as of 27 February 2023. “High US inflation figures stoked fears central banks will prolong their interest rate tightening cycles, forcing investors to rethink optimism about global growth.” (Australian Financial Review, 2023).  The risk, according to Paul Bloxham, Chief Economist for Australia, and New Zealand at HSBC, is that the Central Bank follows the US Federal Reserve in its aggressive approach. In terms of inflation, the CPI increased 6.4 percent in the twelve months to January (not seasonally adjusted). Philip N. Jefferson, Federal Reserve Governor, stated in a recent speech on inflation and the dual mandate that, without a predictable inflation rate, the purchasing power of retirement income streams may differ significantly from what was envisioned when investments were made initially.

European Union (EU)

Inflation

The European Central Bank (ECB) has had to battle higher energy prices and supply bottlenecks first due to the pandemic and later because of the Ukraine-Russia conflict “We will do more hikes if necessary to return inflation to our target of 2 per cent in a timely manner. It will take what it will take”  (Lagarde, 2023). The “Harmonized Index of Consumer Prices” (HICP) for the EU is 10 per cent ranging from 5.8 per cent in Luxembourg to 26.2 per cent in Hungary.  ECB’s main refinancing operations rate is 3 per cent. As Europe is a key player in the financial markets, its inflation rate and interest rate are an important influence in the direction of Australian interest rates. 

United Kingdom (UK) 

The Consumer Prices Index including owner occupiers’ costs (CPIH) increased 8.8 per cent in the 12 months to January 2023, down from 9.2 per cent in December 2022. Meanwhile, the current bank rate is 4 per cent. If UK interest rates were lower than Australia’s, it would make our assets more attractive for global mobile capital, so we will keep monitoring them.  

 

 

 

Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs.  Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things. You should obtain the relevant appropriate document for any product mentioned and consider its contents before making any decision.  

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