No Rate Cut For BoE, But Inflation Worries Loom Large
The Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to maintain the Bank Rate at 5% in its September meeting, underscoring the central bank’s commitment to a restrictive monetary policy stance despite signs of easing inflationary pressures.
The MPC’s projection of CPI inflation increasing to around 2.5% by year-end, up from August’s 2.2%, paints a nuanced picture for financial planning. This uptick, while modest, signals potential headwinds in cost management. CFOs should brace for possible increases in input costs, particularly in sectors sensitive to inflationary pressures. The persistently high services inflation, standing at 5.6% in August, further complicates the pricing landscape.
In response, a review of supplier contracts may be prudent, with an eye towards flexibility in pricing mechanisms. Hedging strategies could also play a crucial role in mitigating price volatility. For service-oriented businesses, the challenge lies in threading the needle between maintaining margins and preserving demand.
The Bank’s revised GDP growth expectation of 0.3% for 2024 Q3, slightly down from the previous 0.4% forecast, underscores the need for a measured approach to investment. In this environment of tepid growth, the allocation of capital takes on heightened importance. CFOs may find themselves needing to recalibrate their investment portfolios, prioritizing projects that promise the most robust returns or align closely with core strategic objectives.
This climate of modest growth also accentuates the importance of operational efficiency. A razor-sharp focus on working capital management could yield significant benefits. Scrutinising inventory levels, reassessing accounts receivable policies, and optimizing supplier payment terms can all contribute to improved cash flow – a critical factor in navigating uncertain economic waters.
Interestingly, the current economic landscape may also unveil attractive M&A opportunities. As some businesses struggle in the face of economic headwinds, others may find themselves well-positioned for strategic acquisitions.
The moderation in private sector wage growth to 4.9% in the three months to July offers a glimmer of relief for corporate bottom lines. However, this figure still outpaces inflation, indicating ongoing pressure on labour costs. The challenge for CFOs lies in crafting a workforce strategy that balances fiscal prudence with the imperative to attract and retain top talent.
Collaboration with HR becomes crucial in this context. Together, finance and HR leaders can develop compensation strategies that are both competitive and sustainable. This might involve exploring alternative forms of compensation, such as performance-based bonuses or equity incentives, which align employee rewards with company performance.
The Bank’s Agents’ report suggesting 2025 wage settlements might fall in the 2% to 4% range provides a valuable forward-looking perspective. CFOs should factor this insight into their long-term financial planning, while remaining agile enough to adjust to potential deviations from this projection.
Rob Hudson, Head of International Banking and Payments at FIS, said:
“The latest news that interest rates are staying at 5% comes as little surprise, considering yesterday’s news from the ONS that inflation has persisted at 2.2%. However, this doesn’t make it any easier for Brits to accept.
“We’re fast approaching winter, a period where consumers are typically more reliant on savings to afford Christmas celebrations and the longer pay gap between December and January. However, with 35% of Brits reporting that they have less than £500 in savings, the recent Bank of England announcement may have consumers making the difficult decision to downsize celebrations this year to avoid high-interest loans.
“Despite this, financial anxiety may not actually spike this winter as would be expected. 48% of Brits are embracing ‘loud budgeting’, the act of publicly living within their means, showing that discussing one’s finances is no longer considered taboo. This new-found openness is ensuring that people are continually aware of their finances and, therefore, putting their money to work as best as possible.”
The MPC’s indication of a “gradual approach to removing policy restraint” suggests that high interest rates may persist for some time. This outlook has profound implications for corporate finance strategies. CFOs should review their companies’ debt structures, weighing the merits of locking in current rates against maintaining flexibility with variable-rate debt.
The hint of improving credit supply noted in the Agents’ summary opens a window for potential refinancing opportunities. Astute CFOs will be monitoring the debt markets closely, ready to optimize their company’s debt profile when favourable conditions emerge.
The high interest rate environment also presents an opportunity to enhance returns on cash holdings. A judicious cash management strategy can significantly boost financial performance, provided it strikes the right balance between yield and necessary liquidity.
The MPC’s decision to reduce the stock of UK government bond purchases by £100 billion over the next year adds another layer of complexity to the financial landscape. This continued quantitative tightening could impact market liquidity and bond yields, with potential ripple effects on corporate finance activities.
For CFOs considering corporate bond issuance, close monitoring of market conditions becomes imperative. The timing of issuance could significantly impact borrowing costs, making it crucial to be prepared to act when favorable windows open.
Companies with defined benefit pension schemes face an additional consideration. The potential impact on gilt yields could affect pension liabilities, necessitating a review of asset allocation strategies in collaboration with pension trustees.
Thomas Gavaghan, Vice President, Global Presales at Kyriba, the global leader in liquidity performance.
“The decision by the BOE to hold interest rates will strengthen the pound benefiting those corporations that import goods and services, but can pose added risk to net exporters who will face increased competition in the foreign markets.
The ongoing high interest rates continue to pressure corporations, particularly those in vulnerable sectors still managing the long-term impacts of the pandemic and rising operational costs. In this environment, treasury teams will need to maintain focus on their liquidity management strategies through robust cash forecasting, effective debt management, and exploring alternative financing options such as payables and receivables financing.
Additionally, the impact on the pound presents heightened risks for companies with international exposure, particularly those earning revenue in weaker foreign currencies. An appreciation in the pound could erode profit margins for UK entities.
We will see an added focus from Treasury departments into their currency risk management strategies by employing more targeted hedging techniques leveraging technology to help better aggregate exposures and target the most at risk currency pairs in their portfolio. Correlated VaR models can help companies assess the financial impact of hedging specific currency pairs while optimising costs, which will continue to be an added focus for companies in the foreseeable future. This can be accomplished by reducing trade volumes and selecting the best hedge-to-cost ratio.”
As the economic environment continues to evolve, scenario planning takes on renewed importance. CFOs should lead the charge in developing robust contingency plans that account for various economic outcomes, from further rate hikes to potential downturns.
Risk management also moves to the forefront. A comprehensive review of hedging strategies for interest rate, currency, and commodity price risks could prove invaluable in navigating economic uncertainties.
Clear and proactive stakeholder communication becomes more critical than ever. CFOs must be prepared to articulate their company’s strategy for navigating the current economic landscape, addressing the concerns of investors, lenders, and other key stakeholders.
Despite economic pressures, the importance of digital transformation and ESG considerations should not be underestimated. Forward-thinking CFOs will continue to drive digital initiatives to enhance productivity and integrate ESG factors into financial planning and reporting processes, recognizing their growing importance to investors and stakeholders alike.
This article first appeared in The Global Treasurer’s sister publication, The CFO.