Retooling treasury for the impending interest rate hikes

By Kyriba November 23, 2015

June 2006 marked the kick-off to the soccer World Cup in Germany. You remember the one where French superstar Zinedine Zidane was sent off in the Final for headbutting Italy’s Marco Materzzi? As we know that final red card brought Zizou’s lengthy, celebrated career to an unceremonious end.

It was also during that same time when we witnessed something else come to an abrupt end – interest rate hikes from the Federal Reserve. June 2006 marked the 17th consecutive – and final – rate hike by the Federal Reserve that started two years earlier in June 2004. By August of 2006, the Fed decided to not continue rate hikes and, as we know, the rates have hovered near zero since coming down. 

Now we are witnessing what will inevitably be the end of almost nine years of these near 0% interest rates. The treasury mindset has changed greatly over those years and certain old standards and practices will need to be dusted off and remembered.

With the rising rates forthcoming, treasury teams will need to focus more on their cash needs, and surpluses, and have more scrutiny over their cash forecasting process. Companies will need to look more long-term in their cash forecasting and have an eye on where their surpluses and deficits will occur. Rates are still favorable now for companies needing cash infusion from debt, and locking in those rates will help avoid higher funding costs moving forward in the short-term market.

With one eye on the future cash needs of the company, the other eye will need to also focus on the current debt position. To help fund acquisitions, dividend payments, and stock repurchasing, corporations in the United States have seen their debt levels more than double since 2007, according to a recent Goldman Sachs report1. Existing contracts tied to floating rates will become more costly over time. The pending interest rate hikes are not expected to be a one-time occurrence, and many analysts believe we’ll see gradual increases during each meeting in 2016. Hedging them against lower fixed rates now will help avoid growing interest expenses against the rising rates.

Lastly, now might be the time for corporations to consider building an in-house bank. Getting visibility into current cash positions globally can unlock cash surpluses in some regions that can help to fund shortfalls in others. Facilitating this through an in-house bank can help the company access those funds more easily than through a third party bank, and offer reduced cost of funding and bank-related fees. 

Now is the time for treasury teams to assess their global technology strategies in place to help empower their teams. Treasuries should be looking at their current solutions in place and ask:

  • Am I getting automated access and visibility into all of our cash internationally?
  • Do I have the tools in place to consolidate our global cash forecast?
  • Am I able to automate and track the reliability and accuracy of my cash forecast?
  • Do my tools help manage my current in-house bank arrangement, or give me the flexibility to build out an in-house bank for my subsidiaries globally?

Plenty of discussions and planning have been had leading up to these pending hikes, including some of the items discussed above. Now is the time where this planning will be called to action and execution – just make sure yours doesn’t involve any headbutting.

Further reading

Five Questions CFOs Should Ask Themselves to Maximize Growth
Four Steps to 100% Global Cash Visibility


1Goldman Sachs Warns: Companies’ Debt Has More Than Doubled! – Motley Fool, November 13, 2015


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