Treasury teams aren’t equipped for a rising interest environment

By Helen Petty, AccessPay

13 June 2018

The global financial crash of 2008 had repercussions which filtered into the daily lives of almost every person bound to the economic cycle. For a select few, the repercussions were positive, for most and to varying degrees, they were decidedly negative.

Amongst those impacted were corporate treasurers, whose job descriptions changed almost overnight. In addition to traditional roles and skillsets, it became necessary for them to become risk managers, corporate strategy advisors, compliance officers, data scientists, regulator managers, and liquidity risk managers.

As a means of mitigating the impact of the financial crash, interest rates were slashed to a minimum and kept there (Figure 1a). Inevitably, of the traditional roles and skillsets which quietly slipped into the background was the ability to react to and manage an increase when it would finally come. For Millennials now holding corporate treasurer positions, it was an ability they’d never had to exercise.

Of course, that all changed in November 2017 when, for the first time in a decade, The Bank of England raised interest rates from 0.25% to 0.5%. Though at the time of writing nothing has been decided yet, investors and City economists are widely predicting that the Bank’s monetary policy committee will raise interest rates again from 0.5% to 0.75% towards the end of in Q3 this year.


One of the overarching consequences of the increase in interest rates, is that financing becomes more expensive. There is therefore an onus on treasurers to make judicious decisions regarding the offsetting of balances and work with a renewed urgency towards a centralisation of operations to deliver a joined-up funding strategy across geographies, entities and currencies.  Alternatively, other treasurers in the position of long cash positions will be cautiously attempting to minimise the lost opportunity cost of uninvested balances without overdrawing accounts.

Another consequence for treasurers to manage, is that a monetary tightening policy leads to general costs of business rising exponentially. Ensuring the requisite capital is available to absorb these costs depends on the company’s position. For those companies’ cash rich, there is the necessity to maintain proper funding of all accounts. Strategies such as investing in money market funds require inputting of trades early in the day when information is often not fully complete and available – this can lead to under investment for fear of not maintaining sufficient funding for daily operations For those companies not cash rich, the focus is centred on minimising credit and overdraft charges and working with greater impetus towards a centralisation of accounts.

The research

AccessPay commissioned research to look into the behaviour of treasury instruments within a monetary policy tightening environment. The focus particularly was on the risks attached to this increase in interest rates and the effect it has on operating cash flow management, in particular short-term debt financing costs and short-term liquidity solutions.

The research involved utilising equations based on historical data to predict the yield of various treasury instruments when subjected to various degrees of monetary tightening. For example, it found that with short-term liquidity instruments, the opportunity cost of investing in money market funds is likely to decrease as rates get higher. In other words, choosing to invest in money market funds – instead of holding capital in term deposits – may be a profitable option in the short term, but as base rates reach 3-5% the yields offered by these funds will be closer to standard term deposits, thereby reducing the opportunity cost.

On the other hand, certificates of deposit displayed unstable equations for increases in base rates. What this means is that as central bank policy is tightened, the opportunity cost of holding certificates of deposit over term deposits will increase.

Clearly then, treasurers have much to contemplate when building a financial strategy which optimises liquidity in the face of rising interest rates. They are now forced into a renewed and urgent focus on value-adding activities and undertakings, and those tasks which are auxiliary to these need to be dealt with in such a way that delivers optimal results yet require much less time to perform.

Going forward

With a sizeable percentage of treasury professionals having never dealt with monetary tightening, coupled with the role of the corporate treasurer diversifying almost beyond recognition, a significant shift in behaviour is needed. Traditional approaches are no longer fit for purpose and run the very real risk of damaging growth, yet there are clear signs they look set to persist within many organisations.

It is critical for corporate treasurers, particularly those new to a monetary policy tightening environment, that they develop the skills needed to deal with the accompanying systemic changes. Proficiency in minimising charges and stimulating returns must take centre stage. However, the other, more perfunctory tasks of a treasurer run the risk of preventing them from achieving this proficiency. Lack of visibility is another impediment. With treasurers needing to react quicker and with greater decisiveness, there isn’t the time to be pulling up reports and spreadsheets from various sources. They need to see what’s happening instantly and in real-time. It for these reasons that technology, largely in the form of automation, must find a place.

It is automation which holds the key to unlocking treasury resource and ensuring liquidity remains predictable and abundant. For those treasurers yet to adopt it, the time for that to change is now.

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