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Reaping the Gains from Rising Interest Rates

Five factors corporate treasurers need to consider as central banks around the world look to increase rates.

Interest rates are on the rise. Finally, after many years of historically low rates across most of the G-20, sufficient economic strength in global markets is poised to drive governments to increase prime borrowing rates.

In the United States, especially, this is yet another indicator that economic recovery has been successful. A strong economy is usually a positive for most organizations. However, treasurers must consider five key factors if they want to reap the potential gains as we enter into what is expected to be a rising-rate environment.

 

Borrowing Costs

Borrowers, especially those with variable-rate exposure, are clearly affected by rising rates. For most floating-to-fixed hedging opportunities, the expectation of future rate increases is already built into the cost of fixing their floating rate. Therefore, the question is not so much one of tactics, but instead one of strategy. Proactive treasurers are thinking about how they can reduce the need for borrowing.

"For many, supply-chain finance has made sense for years. Within a rising-rate environment, the business case becomes even more compelling."Consequently, CFOs and treasurers are turning to cash visibility, forecasting, and working capital optimization as techniques that can help them unlock hidden cash. The simple exercise of uncovering idle or underutilized bank balances is a starting point, which is expanded upon by effective forecasting that tells CFOs exactly how long cash flow will be available. When treasurers can extend the horizon of reliable forecasting, they reduce the need to maintain idle cash, as they have a more clear and confident view of how much cash their organization will require, and when.

 

Supply Chain Impacts

Supply-chain financing can help unlock working capital for organizations. In a period of rising rates, supply-chain financing can also offer a benefit for the company’s suppliers. As interest rates rise, suppliers may find themselves with less access to the low-cost capital they need to continue to manufacture and deliver goods to their customers. This is a particularly prevalent problem for suppliers based in emerging economies. And suppliers anywhere in the world may find that increasing rates are decreasing their opportunity to borrow capital to invest in business efficiencies, which puts pressure on their ability to grow. In some cases, simply maintaining their business may be difficult if they already have rising debt levels.

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