Interest rates raised in Gulf and Europe as Fed treads softly
Central banks across the Gulf have raised interest rates, following an increase by the US Federal Reserve.
The Central Bank of the UAE raised the base rate on the Overnight Deposit Facility by 0.25 percentage points, from 4.65 per cent to 4.90 per cent.
Banks in Saudi Arabia, Bahrain and Qatar also raised their interest rates by 0.25 points on Thursday. In Europe, the Swiss National Bank raised rates by half a percentage point, while Norway’s central bank increased its rates by 0.25 points to 3 per cent, the highest level since 2009.
The Bank of England put its rates up by 0.25 points to 4.25 per cent, its 11th increase.
The rapid rise in interest rates last year, not only in the US but in most of the world’s major economies, was a shock that was months in the making. Two weeks ago, Silicon Valley Bank, used by tech entrepreneurs, started to have real problems as interest rate rises caused a fall in the price of the bonds it invested in.
That caused a rush of withdrawals that led to the biggest bank failure since 2008. Signature Bank, which was involved in cryptocurrencies, followed.
As investors reassessed the banking sector, confidence fell disastrously in Switzerland’s second-largest bank Credit Suisse, which has suffered problems for years.
Action by the sector has brought relief. But there are fears that interest raise rises could further damage a fragile financial system.
“We have to bring inflation down. There are real costs of bringing it down to 2 per cent, but the costs of failing are much higher,” Fed chairman
Jerome Powell said. There could well be one more rise in interest rates in store in the US, the UK and the eurozone before the year is out.
Brian Jacobsen, senior investment strategist at Allspring Global Investments, said: “The Fed is now living on a hope and a prayer that they haven’t done irreparable harm to the banking system.”
The UAE Central Bank has begun to implement its digital currency strategy, Digital Dirham, as it prepares the country’s infrastructure for the future of finance.
The regulator signed agreements with Abu Dhabi’s G42 Cloud and digital finance services provider R3 – the infrastructure and technology providers, respectively – to put the central bank digital currency in place.
The strategy aims to address the “pain points” of domestic and cross-border payments, enhance financial inclusion and strengthen payment infrastructure through additional channels as the country moves towards a cashless society. It will “further position and solidify the UAE’s [position] as a leading global financial hub”, said Central Bank Governor Khaled Balama on Thursday.
Digital Dirham is one of nine initiatives within the Financial Infrastructure Transformation programme unveiled by the regulator in February.
“The launch of our CBDC strategy marks a key step in the evolution of money and payments in the country,” Mr Balama said.
“The CBDC will accelerate our digitalisation journey and promote financial inclusion.”
CBDCs are similar to cryptocurrency except that their value is fixed by the relevant country’s monetary authority and equal to its fiat money.
They are expected to provide some middle ground by reducing the risks associated with using cryptocurrency, which are highly volatile, and providing a stable means of exchanging digital assets.
“CBDC is a risk-free form of digital money issued and guaranteed by the central bank and serves as a secure, cost-effective and efficient form of payment and a store of value,” the UAE Central Bank said.
Central banks around the world are looking into the development of digital currencies amid the growing popularity of cryptocurrencies as an asset class among retail and institutional investors.
As of March 1, 65 countries were at an advanced stage in the development of the CBDC, with more than 20 central banks having already launched their pilot programmes, according to the US think tank Atlantic Council.
The Emirates has been identified as among 18 countries that have made the “most progress” this year.
It joins a list that includes Australia, Brazil, Canada, China, India, Japan, Jordan, Kazakhstan, Laos, Montenegro, the Philippines, Russia, Saudi Arabia, Turkey, Ukraine, the UK and the US, it said.
The UAE Central Bank said its strategy aims to “ensure the readiness of the UAE to integrate the payment infrastructures with the future, potential tokenisation world, [and] the tokenisation of financial and non-financial activities”.
Tokenisation replaces sensitive data – such as bank and credit card numbers – with alternative codes, boosting security by removing the most valuable data that cyber criminals can steal during a transaction.
Global tokenised payment transactions are expected to increase by 47 per cent to more than one trillion by 2026, from about 680 billion last year, according to Juniper Research.
The implementation of Digital Dirham comes as the UAE Central Bank enters the “next major milestone” of its CBDC strategy, the regulator said.
It also follow previous successful partnerships and initiatives, including Project Aber with Saudi Arabia’s central bank in 2020, and the mBridge project for cross-border CBDC transactions for international trade settlements.
The mBridge initiative was carried out last year in collaboration with the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China and the Bank for International Settlements.
Last week, the UAE Central Bank and the Reserve Bank of India signed an initial CBDC agreement to boost co-operation and enable innovation in financial products and services, part of which involves proof of concept and pilots of a CBDC bridge to enable remittances and trade.
“We look forward to exploring the opportunities that CBDC will bring to the wider economy and society,” said Mr Balama.
Tokenised payment transactions are set to increase to more than one trillion by 2026, from 680 billion last year