After the global financial crisis of 2008, the vast majority of central bankers scrambled to stabilise economic conditions by promoting strategies of quantitative easing and inflating their balance sheets with longer-term debt instruments. As a result, bond prices shot up, rates went down and borrowers were able to enjoy years of zero or negative interest rates – meaning there was little-to-no opportunity cost for treasurers.
But just over a decade on from the crisis, that trend of zero interest rates has finally started to reverse. Last summer, the Bank of England announced plans to increase interest rates from 0.5% to 0.75%. Across the pond, the US Federal Reserve followed suit in December by increasing rates a quarter of a point to 2.5%. This represented the ninth increase in America since 2015, with a further hike anticipated in June 2019 despite intense political criticism from US President Donald Trump.
The UK and US aren’t alone. Central banks in Canada, Indonesia, Turkey, Mexico and India all increased interest rates in 2018, with further movement expected in 2019. This new trend undeniably gives corporate treasurers a hefty to-do list over the next twelve months.
So, what will treasurers need to do in order to adapt?
First and foremost, the European Banking Authority has advised that in some cases organisations will want to update their investment policies and cash management strategies in order to work alongside the gaggle of new multijurisdictional finance regulations that popped up in 2018. This will inherently affect financial products, rating systems and a variety of funds.
More important still, as rates continue to increase over the course of 2019, treasurers will urgently need to reassess and revise their borrowing practices. That’s because every single rate increase central bankers choose to impose goes on to increase the opportunity cost of keeping money in the bank – and according to researchers at PwC, an increasing number of organisations will most likely want to optimise their working capital in 2019 to try and offset some of these opportunity costs.
Potential offsets could range from the adoption of new supply chain finance programmes, as well as new payables strategies. Likewise, many firms are being advised to do everything they can in order to slash short-term borrowing or costly funding methods by transitioning to in-house banking and tackling current debts with existing cash.
As you might expect, the vast majority of these reactionary and precautionary strategic measures treasurers will need to deploy throughout 2019 will rely upon some degree of investment in a dynamic new technological solution, or at the very least a total recalibration of existing software systems.
Efficient cash forecasting will be a particularly critical component of any effective TMS or ERP system under this incoming climate of positive real interest rates, tighter margins and increasingly volatile FX conditions. Fortunately, treasurers and CFOs are fairly spoilt for choice where innovative cashflow tools are concerned. Market leaders are now piloting and deploying AI-powered solutions that focus on hyper-integration and streamlined cash management functions designed to shelter firms against the impact of regulatory divergence, rate hikes and difficult borrowing conditions.
Regardless of the type of treasury management solution firms ultimately choose to help them prepare for what’s generally perceived to be ‘the new normal’ in 2019, the importance of carrying out this monumental task simply cannot be understated. Positive interest rates and a normal yield curve can be fantastic for an organisation with the right tools and strategies in place to capitalise upon these trends. But fail to adequately prepare, and teams could end up destroying value in their organisations pretty quickly.