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The Bank of England (BoE) last week announced a rate rise of 0.25bps, taking the base rate back to 0.50bps. Broadly speaking, the market is viewing this as a single rate rise in the next 12 months.
Consumer spending and confidence are therefore expected to remain largely unchanged. Sterling may strengthen slightly and inflation may dampen, as may consumer borrowing. But what does the rate rise mean for UK corporates? And what might the future hold for UK interest rates?
For corporates with surplus cash, the interest rate rise comes as welcome relief after a very stagnant base rate environment for the last decade. “As a result of the rate rise, corporates may start to see the credit interest paid to them by banks increase. This means their cash left on account will work a little bit harder,” says Jason MacDonald, Barclays Director – Liquidity Solutions.
While corporates will continue to focus on the security, liquidity and yield of their cash, MacDonald believes that some companies “may begin to broaden their investment criteria slightly in search of a little more yield, exploring other options that are either on- or off- bank balance sheet.”
Regardless of whether they choose to revisit their investment criteria or not, companies will need to ensure they have the right technology such as forecasting tools and accompanying dashboards to maintain visibility over all their surplus cash and to correctly calculate cashflow. “Having the right technology in place is vital and it may help corporates to take advantage of any future rate rises,” MacDonald believes.
Meanwhile, for corporates with debt obligations, “the priority is to focus on the company’s ability to service that debt in the new rate environment,” says Wayne Hiley, Barclays Head of UK Bespoke Debt Finance. The rate rise, and any future expected rate increases, should therefore be built into cost of debt models.
It’s important to note, however, “that the cost of debt is still at, or close to, historic lows,” notes Hiley. “This is not a move to an environment where the cost of debt forms a significant part of the cost base for corporate clients. In fact, the UK interest rate stood at 0.50bps from March 2009 until August 2016, so this latest move by the BoE is not a complete step change.”
For corporates concerned about the impact of future rate rises on their liabilities, though, there are bank solutions available to help lock in fixed rather than floating interest rates for various scenarios. Companies could also think about taking the opportunity to raise debt with longer dates to mitigate refinancing at higher rates at the future.
In fact, Hiley believes that many corporates currently have very conservative capital structures and could comfortably raise more debt. This could then be used to support business investment, which has been slow in recent months as a result of the ongoing Brexit negotiations.
The geopolitical landscape is also hampering visibility in terms of the future economic – and therefore interest rate - environment, making it difficult to predict what will happen beyond the next 12-18 months. “Nevertheless, European and emerging markets are strengthening. The US economy is also faring well, even after four interest rate rises in quick succession. This means that the UK’s trading partners are strong,” says Hiley.
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