Australian Bond Exchange Weekly Newsletter
Friday 3 March 2023
- 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’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)
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.
ABC News. (2022, February 28). Will the Reserve Bank review achieve anything? What difference could it make to interest rates? Retrieved March 01, 2023, from https://www.abc.net.au/news/2023-02-28/reserve-bank-review-will-it-achieve-anything/102013008
Australian Financial Review. (2023, February 27). RBA peak inches up to 4.4 pc after hotter-than-expected US inflation. Retrieved March 01, 2023, from https://www.afr.com/markets/debt-markets/rba-peak-inches-up-to-4-4pc-after-hotter-than-expected-us-inflation-20230227-p5cnu6
Board of Governors of the Federal Reserve System. (2023, February 28). Selected Interest Rates. Retrieved 03 01, 2023, from https://www.federalreserve.gov/releases/h15/
Digital Finance CRC (DFCRC). (n.d.). Australian Central Bank Digital Currency Pilot Project. Australia. Retrieved March 02, 2023, from https://dfcrc.com.au/cbdc/
Digital Finance CRC (DFCRC). (n.d.). Corporate Bond Settlement. Sydney, NSW, Australia. Retrieved March 02, 2023, from https://dfcrc.com.au/2023/02/28/corporate-bond-settlement/
European Central Bank. (2023, February 08). Key ECB interest rates. Retrieved March 01, 2023, from https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
Financial Review. (2023, February 26). Excess Profits not to blame for inflation outbreak. Retrieved March 01, 2023, from https://www.afr.com/policy/economy/excess-profits-not-to-blame-for-inflation-outbreak-20230226-p5cnpd
Financial Review. (2023, February 27). RBA peak inches up to 4.4 per cent after hotter-than-expected US inflation. Retrieved March 01, 2023, from https://www.afr.com/markets/debt-markets/rba-peak-inches-up-to-4-4pc-after-hotter-than-expected-us-inflation-20230227-p5cnu6
Jefferson, G. P. (2023, February 27). Speech on the Recent Inflation and the Dual Mandate. Cambridge, Massachusetts, United States of America. Retrieved March 01, 2023, from https://www.federalreserve.gov/newsevents/speech/jefferson20230227a.htm
Lagarde, C. (2023, February 24). Interview with Cristine Lagarde, President of the ECB, conducted M.C. Govardhana Rangan. India. Retrieved 03 01, 2023, from https://www.ecb.europa.eu/press/inter/date/2023/html/ecb.in230227~7c09d930f7.en.html
Reserve Bank of Australia. (2023, March 02). Joint Media Release- Research Project Exploring Use Cases for CBDC (RBA & DFCRC). Australia. Retrieved 03 02, 2023, from https://www.rba.gov.au/media-releases/2023/mr-23-06.html
Reuters. (2023, February 26). Australia’s treasurer says curbing inflation remains economic main game. Sydney, NSW, Australia. Retrieved March 01, 2023, from https://www.reuters.com/world/asia-pacific/australias-treasurer-says-curbing-inflation-remains-economic-main-game-2023-02-26/#:~:text=Inflation%20is%20running%20at%20a,3%25%20by%20mid%2D2025.https://tradingeconomics.com/australia/rating
Statista. (2023, February). Harmonized index of consumer prices (HICP) inflation rate of the European Union in January 2023, by country. Retrieved March 01, 2023, from https://www.statista.com/statistics/225698/monthly-inflation-rate-in-eu-countries/
US Bureau of Labor Statistics. (2023, February 15). Consumer Price Index. Washington DC, US. Retrieved from https://www.bls.gov/cpi/