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US rate hike adds to pressure on central banks – Industry roundup: 28 July

US Fed rate hike adds to pressure on central banks

The Federal Reserve has met market expectation by raising US interest rates by 75 basis points for the second successive month, delivering the most aggressive policy tightening in more than 40 years to curb surging inflation The Federal Open Market Committee (FOMC) indicated that “ongoing increases” would likely be needed over the months ahead despite evidence of slowing US economic growth.

The latest three quarters of a percentage point increase lifted the target range for the federal funds rate to 2.25%-2.5% and the cumulative June-July increase to 150 basis points -- the steepest rise since the price-fighting era of Paul Volcker in the early 1980s.

The Federal Reserve raised its benchmark overnight interest rate by three-quarters of a percentage point on Wednesday in an effort to cool the most intense breakout of inflation since the 1980s, with "ongoing increases" in borrowing costs still ahead despite evidence of a slowing economy.

But Jerome Powell, the central bank’s chairman, said that he does not believe that the US is yet in danger of moving into recession. “There are just too many areas of the economy that are performing too well,” he added, indicating that a further large rate increase could follow as early as September.

“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” said Powell.

The latest US rates increase and the prospect of more to come is likely to see the US dollar continue to appreciate against other major currencies. The greenback has recently traded at or near parity with the euro.

Edouard de Langlade, founder of hedge fund EDL has spoken of the currency losing further ground towards 80 US cents – levels last seen in the early days of the euro’s inception over 20 years ago, as resurgent inflation and gas shortages feeds instability in politics and bond markets that could test the region’s cohesion.That could trigger start of a “euro bear market” in a shift from the current bout of dollar strength that’s weakened the common currency, said de Langlade. He argues Russian gas supply risks will drive up record inflation, forcing aggressive rate hikes at a time of recession and causing Germany to potentially baulk at the costs of keeping the eurozone together. The European Central Bank (ECB) sanctioned its first interest rate rise in 11 years last week, although a 0.5% hike only took its key rate out of negative territory to zero.

In Asia, negative real policy rates in Asia are spurring fund outflows and the Fed’s more aggressive rate increases and intensifying the pressure on its Asian counterparts to speed up their own monetary tightening -- or risk further fund outflows and weaker currencies.

Reports suggest that an analysis of policy rates in Asia Pacific versus their five-year averages shows a high degree of vulnerability across the region, as does an examination of interest rates adjusted for inflation, and yield spreads versus US Treasuries.

The level of threat varies considerably, with the greatest danger in markets like Thailand, where the central bank has kept rates at a record low. South Korea and New Zealand, which moved early to front load hikes, are better placed but not immune to trouble.

Recent tightening announcements from unscheduled meetings of the Monetary Authority of Singapore (MAS) and the Bangko Sentral ng Pilipinas (BSP) indicate that Asia’s central banks are susceptible to making rapid readjustments as inflation bites harder than expected.

Central banks such as in Australia and South Korea, which have been quicker to increase rates, have buffers that are closer to their five-year averages. New Zealand is the only country in the region where the buffer will still be bigger than the five-year average after the Fed’s latest 75-basis-points move.

Inflation has risen to the highest level in 23 years in South Korea, 21 years in Australia and 14 years in Thailand and may not yet have peaked as elevated commodity prices and supply-chain disruptions continue to drive up import costs.

The spread is also tighter in Thai, Indian and Indonesian bonds. The central banks in these countries may need to accelerate the pace of policy tightening to push up yields to curb outflows and headwinds for their currencies. More rapid rate hikes from South Korea, New Zealand and Australia have supported yields, resulting in a more attractive spread to the US.. The analysis excluded the central banks of Japan and China. The Bank of Japan (BoJ) is committed to its negative rate and yield-curve control policy, while the People's Bank of China (PBOC) is providing ample liquidity as the economy struggles with the impact of the country's zero-Covid policy.

HSBC bosses to meet Hong Kong investors after three years

HSBC’s senior management has scheduled an informal meeting with Hong Kong shareholders in the city state on 2 August, its first since April 2019 due to the Covid-19 pandemic, amid calls to break up its Asian business.

Chairman Mark Tucker and chief executive Noel Quinn will host the meeting at the Kowloonbay International Trade & Exhibition Centre a day after publication of HSBC’s interim results, reports The Times of London.

While HSBC is based in London it was founded in 1865 in Hong Kong, which remains its single biggest market and the bank’s influential retail investors in the financial hub own around one-third of its shares and. HSBC has been caught in the crossfire of the tensions between China and the west.

The bank was criticised by British politicians after a report claimed that a Chinese communist party committee was set up at its local investment banking arm in Qianhai. Alistair Carmichael, a lawmaker in the Liberal Democrat party, said: “For a group that is headquartered in the UK to be accommodating the Communist Party of China in this way shows a woeful lack of governance and a woeful lack of judgment in the boardrooms that authorise this.”

HSBC has also been under fire from its retail shareholders in Hong Kong. In 2020, they protested after the bank was forced to cancel dividend payments by the Bank of England (BoE), which wanted lenders to conserve cash during the pandemic. HSBC’s dividends are an important source of income for many Hongkongers. While HSBC restored its dividend last year, anger about the incident has lingered in the territory and some of its retail investors are supporting calls for the bank to spin off its Asian business.

In April, Ping An Insurance, its biggest shareholder, called on the bank to explore strategic options such as spinning off its mainstay Asian business into a separate Hong Kong-listed company to unlock greater shareholder value. Recent reports suggested that HSBC will resist the break-up proposal and instead announce plans to speed up its exit from non-core markets and deploy additional capital in Asia. Quinn has already been tilting the bank further towards the region over the past two years.

Colombia issues decree to enable open banking

Colombia's financial industry regulator, Unidad de Proyección Normativa y Estudios de Regulación Financiera (URF), has approved a decree to enableopen banking. Following Mexico and Brazil, Colombia is the third country in Latin America to implement open banking regulation,

The URF decree specifies rules for the transfer of consumer data between financial entities, promotes access to that data to facilitate the development of financial services and functionalities, and clarifies the rules under which entities can market financial services via electronic platforms, among others.

The new regulation allows the commercialisation of clients’ personal data provided they have signed an agreement. It also enables financial entities to offer third-party products or services for sale via electronic channels and to market the technology and infrastructure to provide their services to third parties. The regulation also covers the initiation of payments.

Government agency Superfinanciera, which oversees financial regulation has 12 months to establish the technological, security and other standards for the open financial architecture. Other countries in the region are reported to also be considering implementing open finance, which is already included under Chile’s fintech law.

US consumer watchdog to scrutinise crypto payments

US watchdog the Consumer Financial Protection Bureau (CFPB) plans to scrutinise the use of cryptocurrencies for real-time payments and ramp up oversight of Big Tech companies as they expand into the traditional financial sector.

Rohit Chopra, director of CFPB told Reuters that many questions have been raised about the future of financial services. “The regulators all had a wakeup call when Facebook proposed its Libra project, which potentially could be a currency that rapidly scaled across Facebook’s networks,” he commented.

Chopra argues that the US is not yet ready for Big Tech and the industry has started entering the traditional finance domain. Cryptocurrency  firms came under the radar after the market’s volatility in recent months.

Since big online companies can drive widespread adoption of cryptocurrencies for real-time payments, the CFPB is heavily focused on these firms. There are concerns over incidents of hacking, errors and fraud in crypto payments.

According to a Financial Times report, the watchdog has voiced concerns over entry of Apple’s planned foray into the buy-now-pay-later (BNPL) space. The CFPB warns that such developments could dent competition in a sector which is at a nascent stage and raises questions about how consumer data is being used.

Rohit Chopra told the paper that the watchdog would “have to take a very careful look [at] the implications of Big Tech entering this space”. Among the issues the agency is planning to look at was “whether it may actually reduce competition and innovation in the market”.

Temenos extends partnership with Wipro

Banking software specialist Temenos has agreed an expanded partnership with Indian headquartered IT services and consulting group Wipro to provide cloud-based, core system transformation to global banks. The two companies are already established partners and the new strategic alliance aims to respond to the accelerating demand for technology modernisation across the banking sector.

Following the latest agreement, Wipro has become part of the Temenos IMPACT partner programme, which provides clients with domain expertise to innovate with Temenos’ technology. The new alliance will support banks of all sizes as they look to speed up technology transformation and deliver growth in key regions such as the UK, US, and Australia.

Temenos already has established partnerships with many of the leading systems integrators, including IBM, DXC and TCS. The company added; “Having been one of the first core vendors to embrace cloud native technology and collaborative innovation, Temenos has been reaping the rewards of this commitment. In turn, the vendor has been delivering some impressive financials, characterised by strong revenue growth and healthy operating profitability”.

South Korea’s corporate bond issuance falls on higher interest rates

South Korea's corporate bond issuance in the first six months of 2022 showed a double-digit fall over the same period a year ago amid higher borrowing costs.

Data from the Financial Supervisory Service ((FSS) show the issuance of corporate bonds stood at 96.1 trillion won (KRW) or around US$73.7 billion for H1 2022, down 12.7% from the first half of 2021.

The Bank of Korea (BOK) began hiking its policy interest rate earlier than many of its neighbouring central banks in response to resurgent inflation and has announced six increases since last August. A 0.5% rise earlier this month took the rate to 2.25%, against 0.5% less than a year ago. The bank holds its next policy meeting on 25 August and economists expect the rate to reach 2.75% by the end of this year.

Data from the Financial Supervisory Service ((FSS) show the issuance of corporate bonds stood at 96.1 trillion won (KRW) or around US$73.7 billion for H1 2022, down 12.7% from the first half of 2021.

The Bank of Korea (BOK) began hiking its policy interest rate earlier than many of its neighbouring central banks in response to resurgent inflation and has announced six increases since last August. A 0.5% rise earlier this month took the rate to 2.25%, against 0.5% less than a year ago. The bank holds its next policy meeting on 25 August and economists expect the rate to reach 2.75% by the end of this year.

Bonds sold by industrial companies in H1 were 29.2% lower year-on-year at KRW21.8 trillion, while those issued by financial companies were down 6.1% to KRW67.54 trillion.

However equity financing, including initial public offering (IPO) and rights issuance, was up 45.8%
y-o-y to KRW18.42 trillion, reflecting the massive IPO in January of LG Energy Solution, South Korea’s largest to date.

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