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By GEOFFREY SMITH
with IZABELLA KAMINSKA, BEN MUNSTER and ANJULI DAVIES
— BIS urges central banks and financial institutions to quantum proof their systems.
— Australia’s RBA and Poland’s NBP both have rate meeting decisions today.
— Whither Germany? Bundesbank President Joachim Nagel wonders aloud if Germany’s business model still has a future.
ECB 3.75% ⇡ — BOE 4.5% ⇡ — FED 5.35% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡ — PBOC 3.65%⇣— CBR 7.5% ⇣ — SARB 8.25% ⇡
Good morning and welcome to Tuesday. Technology, as we all know, poses a broad range of challenges. For some, that means devising a cryptography so secure that even some titanic future generation of supercomputers can’t crack it. For others, the challenge is to develop mechanisms that will root out deepfakes capable of emptying bank accounts. Others still, meanwhile, would be satisfied with devising a button that stopped them putting out September’s press release by mistake. Takes all sorts.
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— The Reserve Bank of Australia raised interest rates by 25 basis points to 4.10 percent.
— National Bank of Poland rate decision, 5 p.m
— SEC goes after Binance in what may prove to be a devastating blow for today’s crypto markets.
STICK OR TWIST: The Reserve Bank of Australia decided to increase the cash rate target by 25 basis points to 4.10 per cent at its monetary policy meeting on Tuesday. It also increased the interest rate paid on exchange settlement balances by 25 basis points to 4.00 per cent.
The Aussie dollar strengthened on the decision after the RBA said that “further monetary policy tightening may be required” to bring inflation back to target.” That’s despite clear signs of external demand — in the form of Chinese imports — slowing.
“AS WE MAY HAVE ALREADY SAID…”: And, er, the National Bank of Poland announces its policy decisions at 5 p.m. Again. A rate cut may be too much to hope for, but a considerable minority in the market has built up expectations of a shift in guidance, spelling out a start to policy easing in the second half. President Adam Glapiński will have to either satisfy or disappoint on that score.
Blame it on the IT department: Meanwhile, check out Izzy’s story about an unfortunate pre-release of its decision that occurred at the weekend. (This is known in the newswire world as ‘doing a Roman’, after one immortal reporter published the “ECB leaves rates unchanged” headline 30 seconds early because he “wanted to check that the keyboard wasn’t sticking.” But that’s a story for another day.)
IMAGINE THERE’S NO BINANCE, CZ if you try: Bitcoin tumbled to a three-month low after the U.S. Securities and Exchanges Commission finally got around to announcing fraud charges against the world’s largest remaining crypto exchange.
ANYTHING BUT REASSURING: The eurozone still grew at a decent clip in May but looks increasingly like it’s set for a slowdown, according to the final S&P composite PMI. The sharpest drop in factory output since November has cooled prices to a 28-month low, and collapsing order books point to more of the same.
Thank heavens for services: But wages are still rising, the labor market remains strong and tourists are still flocking to Europe. Tourism is apparently “flourishing” and remained near its peak in May. That leaves services companies still in a position to raise their prices markedly. As such, the sharp drop in May’s consumer price index might be a one-off, said Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, who noted that the implications of price components were “anything but reassuring” for the ECB. For more see Anjuli’s story here.
SNB TARGET IN REACH: Boringly predictable, perhaps, but the Swiss look set to become the first in Europe to be able to claim victory over inflation. Core prices grew at only 1.9 percent year-on-year in May, falling below the SNB’s 2 percent target. That’s a stark contrast with either the Eurozone or U.K.
A QUANTUM-READY FINANCIAL SYSTEM: Researchers at the Bank for International Settlements’ Innovation Hub put out no less than 50 pages of findings into what central banks and financial institutions must do to make their systems resistant to quantum attacks, that is, attacks by computers powerful enough to break down the cryptography that makes transactions secure today. The financial system, they noted, is already vulnerable to cyber attack, but “a quantum computer attack could have a far more damaging and costly impact for the financial system than a conventional one”.
No time to waste: That’s why central banks must begin to prepare now, and why the BIS — under the auspices of Project Leap — is already working with the Banque de France and the Bundesbank to figure out what to do. The conclusions so far are that to be properly ready, banks should prepare for agile frameworks where they can adapt quickly to vulnerabilities as they become known.
But are qubits really a thing yet? Well, yes and no. The report’s authors reassure that quantum tech is unlikely to be deployed for at least another 10 years, but the concept of “harvest now, decrypt later” remains a risk. This involves state actors or adversaries piling up today’s encrypted data in the hope that one day they’ll get their hands on a quantum computer that can decrypt it all. “Given the long-term sensitivity of financial data and the complexity of today’s IT systems, not to mention the potential cost of recovering from a major cyber intrusion, central banks need to address this threat well in advance,” they noted.
Quantum leap or quantum coincidence? Here’s a small scooplet for Morning Central Banker readers: we can confirm that the popular 80s TV show featuring Scott Bakula as a time travelling dogooder played no part in the naming of “Project Leap”. Though we do understand a clip from the show has since been well circulated in the Basel Tower.
ARTIFICIAL GENERATIVE FRAUD: If you thought phishing attacks were bad enough, consider this story from the WSJ about how a man in China received a video call from an imposter on the nation’s premier hybrid banking and messaging app WeChat. The call appeared to be from a friend, and persuaded the man to transfer $600,000 to a bank in Inner Mongolia. As the report notes, as far as the man was concerned, he thought he was talking to his friend. “I recognized the face and voice in the video; that’s why I let my guard down,” Guo told authorities, according to a social-media post by Inner Mongolia police cited by the WSJ.
Faking trust: Authorized push payment fraud, or APPF for short, has in recent years been the bane of the banking system. This is because systems that were set up in the days of yore [think BASIC and PONG era] simply couldn’t cope with matching names with bank accounts. This allowed crooks to dupe customers into sending payments to official-sounding accounts, which in reality belonged to scammers. Overlay systems have since been applied to help flag when account names don’t match the account numbers on record, regulating the problem somewhat. But nobody adopts technological advances quicker than a crook…
Imposters at the ready: Banks may soon have to face up to the reality that the huge sums they’ve invested in APPF overlay systems could prove to be useless at preventing “friends” from asking for payments to be directed to fraudulent accounts. Verification might now require direct contact and identity confirmation with the counterparts involved. Bob Lyddon, of Lyddon consulting, long a critic of the current overlay solution, told Morning Central Banker that this just proves the current system was never up to scratch. “The authorities here need to completely change tack on the protections against APPF (Confirmation of Payee and Contingent Reimbursement Model) because they are ineffective… even in its current form and will be overwhelmed by AI-backed APPF,” he said.
The ECB’s Christine Lagarde and the Fed’s Jerome Powell, both of whom were duped earlier this year into conducting interviews with Russian imposters, should beware. As should all other policy makers who engage in Zoom calls.
ROLL IT BACK, NOW: Just as Christine Lagarde was signing and exchanging letters with the European Parliament on increasing the transparency and accountability of the European Central Bank, she had a message herself to send back to the bloc’s parliaments. Lagarde wants governments to pull the plug on any grants or subsidies put in place to deal with the energy crisis or else risk fuelling inflation. “Roll it back, roll it back now,” the central bank chief exhorted.
Immense load: European countries have forked out nearly €800 billion to households and companies to help shield them from soaring energy costs, researchers have estimated, with Germany topping the list.
Honey, I’m shrinking the balance sheet. During a grilling in front of the Parliament’s committee on Economic and Monetary Affairs Lagarde also fielded a question on the ways in which the ECB is shrinking its huge balance sheet, saying “you will probably think it’s not enough but we are heading in that direction.” She gave a strong hint that the central bank would decide to stop all reinvestments in its 3.2 trillion euro Asset Purchase Programme (APP) at its next meeting, and let the portfolio start to run off. The ECB’s balance sheet is set to shrink by nearly €500 billion later this month when one long-term lending operations, or TLTRO, expires.
UPSTAGED BY A GERMAN: Apologies to Madame President, but yesterday’s most interesting speech was not in Strasbourg but in Bochum in the Ruhr, where Bundesbank President Joachim Nagel was wondering aloud whether Germany’s business model has a future.
Spoiler alert: he’s “in no doubt that the German economy will be able to rise to the challenges ahead.” But you could be forgiven for having thought otherwise, after listening to his analysis of Germany’s exposure to supply chain stress, its aging workforce, and of a competitive disadvantage on energy prices for which there is no obvious remedy.
“All other things being equal, there is likely to be an incentive for energy-intensive industrial plants to tend to invest in countries where energy costs are comparatively low and will remain so in future,” does not sound like it got the approval of the Invest in Germany Marketing Board.
As for demographics? Nagel pointed out that Germany’s ability to replace retiring workers with migrants is likely to run out by 2026. At that point, barring a major change in migration policy, the pressure on the workforce to support the growing ranks of pensioners will greatly intensify.But then, as Nagel pointed out, the doomsayers were saying equally dire things about Bochum when its last coal mine shut 60 years ago, long before its recent reincarnation as a hub for IT security and healthcare firms.
And, of course, Bochum has VfL — Die Unabsteigbaren (The Unrelegatables) — who just pulled off the latest miraculous campaign to keep their Bundesliga status. It doesn’t pay to write off a country with a club like that…
“As the energy crisis fades, governments should roll back the related support measures promptly and in a concerted manner to avoid driving up medium-term inflationary pressures, which would call for a stronger monetary policy response” ECB President Christine Lagarde, to the European Parliament on Monday.
“Germany sources its imports of rare earth elements almost entirely from China. German industry faces much the same situation when it comes to specialized intermediate goods. In extreme cases, these are sourced from just a single Chinese supplier,” Bundesbank President Joachim Nagel in a speech in Bochum on Monday.
“Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.” — U.S. Securities and Exchanges Commission Chair Gary Gensler.
TURKISH SURPRISE: Reuters reported on Monday that Turkey’s President Tayyip Erdoğan was considering appointing Hafize Gaye Erkan, a senior finance executive in the United States and a former co-CEO of [grimace now] First Republic Bank, as the new governor of the country’s central bank. If appointed, she would replace current bank chief Şahap Kavcıoğlu, best known for having slashed rates into a perfect inflationary storm which saw the country’s inflation rate hit a record 85 percent in October 2022.
— Foot-dragging over central bank chief underscores Lebanon dysfunction (FT)
— Big banks could face 20 percent boost to capital requirements (WSJ)
— Inside the SEC’s allegations against Binance and CZ (Bloomberg)
— Record demand for 35-year mortgages as first-time buyers face soaring rates (Daily Telegraph)
— RBA bans PwC from new contracts until scandal cleared up (Central Banking)
— UFOs might be real, though it’s unclear if they pose a risk to financial stability (The Debrief)
THANKS TO: Ben Munster, Anjuli Davies and Izabella Kaminska.
TUESDAY, June 6:
(Editor’s note: this is intended as a selective list, giving precedence to European events.)
— Reserve Bank of Australia rate decisions, 6:30 a.m.
— ECB harmonized competitiveness indicators, 10 a.m.
— ECB consumer expectations survey, 10 a.m.
— ECB weekly financial statements and APP/PEPP portfolio updates, 3 p.m.
— National Bank of Poland rate decision, 5 p.m.
All times CET, unless otherwise noted.