US Federal Reserve compromises with 0.25% interest rate rise

Aiming for a delicate balance in the wake of US bank failures, the Federal Reserve has continued with its policy tightening but only lifted rates by a further 0.25% to a range of between 4.75 and 5%, following several hikes of 0.50% over recent months.

The increase was the Fed’s ninth consecutive rate rise and took US rates to their highest since 2007. It came a year after the US central bank launched an aggressive campaign to pull down price growth from its highest levels in a generation.

The Fed indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of Silicon Valley Bank (SVB) and Signature Bank. “The new hike-and-see approach from the Fed was sufficiently vague and open to interpretation by stating that some additional policy firming may be appropriate rather than the previous line of ongoing increases,” said Toby Sturgeon, Global Head of Fiduciary Investment Services at UK wealth planning firm ZEDRA,

The Fed’s change of policy was followed today by the Bank of England in its latest interest rate decision. The BoE announced a 0.25% increase to 4.25%, the eleventh since the Bank began raising UK interest rates in December 2021. There had been speculation that the BoE could hold off this month, but the unwelcome surprise of an uptick in the UK inflation rate – which had been expected to move back below 10% in February – from 10.1% to 10.4% saw a more hawkish stance anticipated from its monetary policy committee (MPC). “This week’s inflation figures left the Bank of England with little choice but to raise the base rate once again today," commented Jon Causier, Partner at global consultancy Simon-Kucher & Partners,

The MPC voting split was 7 to 2 for the increase, with two members voting for rates to be kept on hold this month.

The Fed’s open market committee said yesterday: “The US banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The committee remains highly attentive to inflation risks.”

The Fed chair, Jerome Powell, has consistently said that taming inflation is the central bank’s top priority. US prices were 6% higher in February from a year ago, down from the 9.1% annual rate of inflation recorded last June but still far from the Fed’s target of 2%.

Before SVB’s collapse Powell told a Senate banking committee: “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”

After Powell’s testimony analysts speculated that the Fed could increase rates by another 0.5% percentage points after its March meeting. But those calculations were thrown off by the banking crisis. The Fed’s decision to keep raising rates to tackle inflation, coming days after the European Central Bank (ECB) made the same decision, increases the odds that the BoE will follow suit today.

“Given the constraints, he [Powell] did fairly well, threading the needle of highlighting the Fed’s tools to support financial stability without having those efforts be interpreted by the market as inflationary, which would risk de-anchoring long-term inflation expectations and effectively exacerbate bank liquidity problems,” said Ryan Brandham, Head of Global Capital Markets, North America, Validus Risk Management.

• Switzerland’s central bank raised its benchmark interest rate from 1% to 1.5%, to counter “the renewed increase in inflationary pressure”. The Swiss National Bank said that it cannot rule additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term. The increase came three months after the SNB lifted its rate from 0.50% to 1% last December.
  
  The past week had been marked by the events surrounding Credit Suisse, the SNB acknowledged, adding: “The measures announced at the weekend by the federal government, the Swiss Financial Market Supervisory Authority (FINMA) and the SNB have put a halt to the crisis. The SNB is providing large amounts of liquidity assistance in Swiss francs and foreign currencies. These loans are backed by collateral and subject to interest.”                                                                                                                                                                                                                                                    
• Norges Bank, Norway’s central bank surprised markets on the hawkish side today, as a well-telegraphed 25 basis point (bp) rate rise to 3.0% was accompanied by a pledge to hike again in May, as policymakers moved to counter the inflationary effect of a weaker krone. Updated rate projections now signal Norway's rates will reach 3.50% this summer

Commodities finance “resilient to banking turmoil”

The recent sharp falls in bank shares will not have a knock-on effect on commodities, global trading firm Trafigura's chief financial officer (CFO) Christophe Salmon predicts.

Speaking at the Financial Times Commodities Global Summit on Wednesday, Salmon said: “On banks’ appetite for trading firms, let’s not forget trading firms give banks a lot of business opportunities from hedging to trade finance, M&A and so on…

“We are eligible to many products in banks so they are keen to support us.”

Salmon also said that he did not expect banks’ appetite for financing commodities trade to wane after the takeover of Credit Suisse by UBS, adding that the entry of export credit agencies is a major development in commodities finance markets.

“New lenders (are) now active in our sector, which are the export credit agencies. We managed to raise close to US$5 billion of competitive term funding with the support of these export agencies,” he remarked.

Trafigura has entered into several energy and metals deals in recent months involving German and Italian export credit agencies.

However, reports suggest that trading houses in Switzerland are worried that UBS Group’s takeover of Credit Suisse could have a negative impact on their industry. Commodity-trade financing has undergone years of consolidation.

Major Swiss banks played a key role in establishing the country as one of the world’s biggest commodities hubs, providing firms with the credit needed to procure, store and transport oil, metals and agricultural products. With smaller players in Swiss hubs relying on a handful of key relationships, the combination of the nation’s two largest banks could restrict smaller traders’ access to vital banking services.

Conference speaker Torbjorn Tornqvist, CEO of Swiss energy trader Gunvor said he expected oil prices to move higher towards the end of the year as rising Chinese demand tightens oil balances further.

Tornqvist said he didn't see much demand growth coming from outside of China. He added that while gas prices are now trading at their lowest in one and a half years, "it's too early to say we won the war on gas", referring to Europe's ability to replace Russian gas imports.

Separately, in an interview on the conference sidelines, Tornqvist told Reuters that Gunvor made strong profits last year and is looking to expand its oil trading and develop a significant power trading arm in the United States.

IMF agrees US$15.6 billion support package for Ukraine

The International Monetary Fund (IMF), the global lender of last resort, has agreed a package of support for Ukraine of US$15.6bn (£12.8bn). It breaks ground for the Washington DC- headquartered fund as the first such support for a country at war.

The conflict had taken a “horrific humanitarian toll” on Ukraine, said Gavin Gray, the IMF’s mission chief for the country, but it also “continues to have a devastating impact on the economy.

“The authorities have nevertheless managed to maintain macroeconomic and financial stability, thanks to substantial external support and skilful policymaking.”

Gray recently held talks in Warsaw, Poland, with officials from Ukraine, having been picked to head up the Fund’s mission in Ukraine last year, in part due to his experience working for the fund on its activities in Iraq from 2018 to 2020.

“The overarching goals of the authorities’ programme are to sustain economic and financial stability in circumstances of exceptionally high uncertainty, restore debt sustainability and support Ukraine’s recovery on the path toward European Union (EU) accession in the post-war period,” Gray added.

Ukraine’s economic output measured by gross domestic product (GDP) shrank by 30% last year following the invasion by Russia on February 24 and poverty levels have risen significantly. Pressure on public spending to support the economy and manage its war effort is considerable. The US is the Fund’s largest shareholder and has contributed more to Ukraine in aid and military support than any other country.

US Treasury secretary, Janet Yellen, said: “An ambitious and appropriately conditioned IMF programme is critical to underpin Ukraine’s reform efforts.” The loan still needs to be signed off by the IMF’s executive board, a process that should conclude within weeks.

Digital currency firms “look to crypto-friendly Swiss banks”

Cryptocurrency firms are scrambling to find institutions to bank with after the collapse of Signature Bank and Silvergate Capital in the US.

A report by CNBC suggests that many companies have turned to crypto-friendly Swiss banks, flooding them with requests for banking services and encouraged by Switzerland’s crypto-friendly regulatory regime.

The report adds that enquiries have been coming despite turmoil in the Swiss banking sector after Credit Suisse's recent problems and eventual acquisition by UBS in a regulator-brokered deal to stem contagion to other lenders. The episode has "put Switzerrland's reputation as a stable financial hub on the line but it has not deterred crypto companies.”

“We have been inundated with requests,” an advisor at a private Swiss bank, who preferred to remain anonymous, told CNBC. The advisor said that on the Monday after Silvergate and Signature Bank’s winddown this month, the private lender had more requests in a single day than ever before.

The advisor said the “problem is still there” in terms of crypto firms still needing banking services, adding that people are seeing the Credit Suisse incident as an “unfortunate single risk” with an individual bank.

Dominic Castley, chief marketing officer at Sygnum, one of Switzerland’s biggest banks that focuses on servicing digital asset companies, said it is seeing an influx of enquiries.

“Over the past weeks as the current banking industry events have unfolded, we have seen a significant increase in onboarding enquiries from various international locations,” Castley said, adding that Sygnum’s location in both Switzerland and Singapore is attractive to companies.

Sygnum has a Swiss banking license and a capital markets services license in Singapore, bringing it under the purview of regulators.

Switzerland has created what locals dub “Crypto Valley” in the region of Zug, just outside the Swiss capital Zurich, where start-ups and more established digital currency firms have set up operations..

In 2021, the government introduced a regulation on companies using so-called “distributed electronic register technology” or blockchain, which originated with the cryptocurrency bitcoin but has since evolved.

Thierry Arys Ruiz, CEO of Swiss-based blockchain firm AgAu.io, said that Switzerland is “more stable” and there is “more certainty to what the rules are.”

Nigeria’s cash shortage boosts CBDC adoption

Nigerians are overcoming their antipathy to digital currency for transactions, after the country’s chaotic demonetisation policy created a shortage of banknotes and bolstered demand for alternative payment methods.

Take-up was initially sluggish when central bank digital currency (CBDC) the eNaira launched in October 2021 but the value of eNaira transactions has surged 63% to naira (NGN) 22 billion (US$47.7 million) this year, while about 13 million so-called e-wallets have been opened, a more than 12-fold increase from October, said Godwin Emefiele, the Central Bank of Nigeria’s governor.

The amount of currency circulating in Africa’s largest economy has meanwhile dropped to about 1 trillion naira from 3.2 trillion naira in September, he told reporters in Abuja, the capital city.

Nigeria was hit by an acute cash shortage in late 2022 after the central bank began replacing old NGN 200-, 500- and 1,000 notes with new ones in a bid to mop up excess liquidity, rein in inflation and curb rising insecurity.

Some state governors challenged the programme in court and the Supreme Court extended a 10 February deadline set by Emefiele to phase out old notes until year-end. About 90% of transactions in Nigeria’s informal economy are conducted using cash.

To support efforts to bring the informal economy under control, the central bank plans to only put “an optimal level of cash” in circulation to discourage people from bypassing the banking system, according to Emefiele. The regulator is working with operators to resolve congestions that hinder smooth electronic payments.

Of the more than NGN10 billion of the digital currency minted so far, about NGN3.4 billion is already in circulation, Emefiele said. He partly attributed the increased adoption of the eNaira to the government using it to pay poor Nigerians who qualified for aid under a welfare programme — with four million new e-wallets opened as a result.

“The eNaira has emerged as the electronic payment channel of choice for financial inclusion and executing social interventions,” the governor said.

ConsenSys, the parent company of MetaMask, recently announced its MoonPay integration, allowing Nigerians to purchase crypto through bank transfers. The MetaMask mobile and Portfolio DApp have been enhanced with the addition of a new feature that allows users in Nigeria to purchase crypto without using credit or debit cards. This simplifies the buying process and provides additional accessibility for users.

Circle picks crypto- friendly France for European headquarters

US payments technology developer Circle, issuer of the USDC stablecoin, has applied for regulatory approval in France and plans to set up its European headquarters in Paris.

The company said that it was attracted by the French government’s crypto-friendly stance and is is seeking approval from the national regulator, the Autorité des Marchés Financiers (AMF) to become a digital asset service provider (DASP)

Jean- Noël Barrot, Minister Delegate to the Ministry of Finance, said: “we are delighted and honoured that Circle chose France as the base for the development of its activities in Europe. This decision fully validates France’s ambitions to become a hub for Web3 technologies, pursued with strong leadership by President Macron and Minister Bruno Le Maire since 2017.”

Circle’s co-founder, Jeremy Allaire, Added: “France’s comprehensive efforts towards innovation-forward crypto regulation are commendable and closely align with Circle’s vision for the future of the digital payments sectors.”

Circle said that after it gets AMF registration, it will become the first company to have full registration under the DASP regime.

Once the Markets in Crypto Assets (MiCA) bill comes into force, full registration for crypto companies in France will become mandatory. The draft for the European Union’s (EU) MiCA legislation is expected to be released by 17 April.

Circle recently revealed that it had US$3.3 billion of its US$40 billion USDC reserves at the failed Silicon Valley Bank (SVB). The news saw investors cash out over US$2 billion worth of the stablecoin, breaking its peg with the US dollar.

While the money in SVB and the dollar peg were recovered, USDC's market capitalisation was impacted took a hit and Circle is now reiterating its call for US regulation that would make it a full reserve federally supervised institution.

At a conference held at Warwick Business School, Circle’s senior policy specialist, Tarleton Watkins said that one long term option for retail stablecoins could involve a wholesale central bank digital currency (CBDC) at the Federal Reserve as a backing instrument, but in the meantime holding dollar reserves with the Fed rather than various financial partners would be a logical step in light of SVB’s failure.

“In some ways, the events surrounding SVB act as a vindication of what we have been advocating for and that is a full Fed reserve model, where we could have access to risk-free cash.

“Although it is rare to have cascading bank failures, like in the financial crisis of 2008, this event with SVB put Circle through a very serious stress test, and we have come through it.”

• Gibraltar-based Xapo Bank, a Bitcoin custodian and licensed private bank, which promotes itself as “where private banking meets crypto” has announced a collaboration with Circle “to become the first licensed bank in the world to integrate USDC payment rails as an alternative to SWIFT”. By adding outrails to its existing USDC onramps, Xapo Bank is enabling members to bypass ‘costly’ and ‘time-consuming’ SWIFT payments. Instead, they can deposit and withdraw via the stablecoin with no fees charged by Xapo Bank,” the bank stated.

Exchanges publish globally agreed framework for green equities 

The World Federation of Exchanges (WFE), the global body for exchanges and central counterparty clearing houses (CCPs), has announced its industry-wide WFE Green Equity Principles, described as the first global framework for designating stocks and shares as green, thereby countering greenwashing and supporting the enhanced flow of funding towards more sustainable economies. 

The Principles, agreed upon globally by members, bring the industry together with a harmonised definition. They are designed to be a framework, consisting of ‘’WFE Green Criteria for Equities’’ and the ‘’WFE Green Equity Classification.’’ The framework is based on the following five overarching pillars: Revenues/investments; Use of a taxonomy; Governance; Assessment; andDisclosure

The purpose of the WFE Green Equity Principles is to enable:

Exchanges to: 

• promote improved access to capital by issuers whose activities are primarily green; and
• provide investors with additional information on green activities to aid their capital allocation decisions.

Issuers to:

• raise their profiles among investors that are actively looking to deploy capital to companies committed to sustainability; 
• use the classification as a marketing and communications tool; and 
• increase visibility of their green credentials and commitment to the green economy which can help to mitigate against greenwashing.

Investors to:

• have information that will assist them with their investment decision-making.

Nandini Sukumar, Chief Executive Officer of the WFE, said: “This is a milestone in sustainable finance. The exchange industry has worked together over the last year to agree on the Principles which are a structured framework.

“The WFE Green Equity Principles provide a carefully evaluated structure within which exchanges set criteria for issuers and investors to demonstrate their green credentials. Investors should be able to have greater visibility of issuers who have green activities in a way that is rigorous and that counters greenwashing. Exchanges strive to bring clarity, consistency and rigour to the concept of green and to counter greenwashing.”

Standard Chartered launches digital working capital and lending on Straight2Bank

Standard Chartered announced the global launch of the working capital and lending capability on its Straight2Bank (S2B) platform, the Bank’s online banking platform for businesses to manage their transaction banking needs.

S2B Loans is “a new module which allows clients to initiate and approve new loan drawdown and rollover requests. In addition to providing a real time view of the facility limits and utilisations, clients can also track the maturities of their outstanding transactions and repayment dates through an easy-to-use interface.

“By digitising and simplifying the end-to-end exchange of information, clients are able to view real time updates on the progress of their loan requests, thereby benefitting from greater transparency and cost efficiencies across the supply chain. This capability eliminates the challenges associated with paper-based loan drawdowns, including the inefficient process of physical signatures as well as the manual tracking of limits and transaction status.

S2B loans is now available in the Bank’s key markets, with a progressive roll out across the rest of its footprint.

Jia Yu Liao, Standard Chartered’s Global Head of Working capital, said: “With the launch of our working capital and lending capability on S2B, our clients can now view transaction information across their cash, trade and working capital facilities in a single interface.

“Not only does this offer a faster and more seamless experience for corporates in making better working capital decisions, the move to a paperless process is also a step forward in our journey towards sustainability.”