Anyone long for a return to a more predictable economic time? Be prepared for a rather long wait, as the rate rise from the Bank of England’s (BofE) signals anything but a move to more conventional times.
Anyone long for a return to a more predictable economic time? A time when a rise in interest rates immediately triggered more overseas investment, leading to an inevitable strengthening of a country’s currency. Well, get prepared for a rather long wait, as the rate rise from the Bank of England’s (BofE) signals anything but a move to more conventional times.
In theory, an interest rate rise should be good for the pound. But despite sterling briefly spiking from $1.3215 to $1.3279 a day prior to the announcement, it fell sharply by 1.3% against the dollar once the rise was made official. Failing to give a definitive timeframe for future hikes plays a role in this, as markets would have been pricing in a more hawkish stance on the BofE’s future monetary policy direction. So with this unfamiliar backdrop of a rate rise leading to a weaker pound front of mind, how should treasurers plan to manage pending hikes from an accounting and cash forecasting perspective?
Regardless of when the next interest rate rise takes place, the truth is that continued uncertainty fuelled by events such as Brexit, means that there is no telling what level Sterling will be at from one day to the next. This is precisely why treasurers need to be able to stress test and carry out scenario analysis, all with a view to getting a better grasp of how sharper interest rate rises will affect their business. Hedging should also be factored in, as it can offer significant benefits in terms of reduced costs while providing new sources of liquidity. But these benefits can only be achieved if treasurers have a complete visibility into their currency exposure at any given time to actively manage unexpected situations.
Trying to work out the full effect of the BofE’s latest monetary policy decision is anyone’s guess at this stage. Like the currency markets, treasurers will be seeking clarity as to when the next hike is likely to take place. Until then, without full insight into daily macro conditions, treasurers are left overly exposed to currency risk that can negatively impact their bottom line. Preparing now to handle the impact of this first rise is exactly what’s needed to ensure treasurers are ahead of the curve whenever the BofE decides to hike rates again in the future.