The treasury toolkit: managing idle cash in 2024

Economic uncertainty, inflation, new tech, interest rates, market jitters… all affect how firms approach deposits, and the situation looks set to evolve further.

While inflation is now dropping in the UK, some analysts remain sceptical about the pace of decline. This has led to predictions of rates remaining “higher for longer”, which may only start to ease from the spring. The Bank of England (BoE) too has been signalling a prolonged pause, as the BoE Governor Andrew Bailey called out in the December press conference that monetary policy will need to stay restrictive for “an extended period of time” despite a bleak economic outlook. 

But the economists as well as the markets’ view has evolved since late last year. “The inflation story is turning a corner and is now widely forecasted to fall steadily this year, reaching the targeted 2%, or close to, by the spring,” says Marcus Wright, a Senior Economist at NatWest. “This in turn will support rate cuts by the Bank of England in order to support the UK’s weak economic growth. To put things in context, markets are baking in five cuts in 2024 and a further three in 2025. Consensus too has evolved, with prominent forecasters baking in four cuts in 2024 followed by further cuts in 2025.”

As of early February the BoE’s base rate is 5.25%, and even if there are cuts in the months that follow, businesses should not expect the near-zero rates of previous years.

How high rates affects treasurers

Naresh Aggarwal, an associate director in the policy and technical team at the Association of Corporate Treasurers (ACT), says the possibility of higher rates for longer is affecting his organisation’s members.

With the opportunity for deposits to earn decent interest, businesses can’t afford to have idle balances doing nothing. Naresh’s advice is to “roll where it's material” and he says people have started to look at aggregating small, disparate balances into single, central deposits.

“Use some form of pooling, whether it’s zero balancing or notional pooling,” he says, adding that higher interest rates mean people are looking harder at trapped cash, that is cash that’s hard to get at. “Before, it may not have been worthwhile people with money in places like India, Latvia or Poland trying to bring it all centrally so they could use those balances.”

That’s now changed. “Even if you lose some money bringing them back to more liquid currencies, the cost-benefit analysis, given where we are in terms of interest rates in the UK, Europe and the US, makes it more compelling to absorb costs. That includes withholding tax or the administrative costs of bringing money back. People want to bring them, as far as is operationally possible, back into central locations, either to pay off expensive debt or to gain interest on balances.”

With interest rates predicted to remain sticky, treasurers are paying more attention to residual balances, but working capital remains a question. “It’s easy to relax working capital, but it requires constant attention. With interest rates remaining high, managing working capital is important. If you’re not looking at it, your customers or suppliers are. They may be looking to extend payment terms or accelerate receipts. If you’re not managing it, you may find that your working capital is suddenly consumed significantly by other people. Keeping attention on working capital is critical.”

Technology and new standards are helping finance teams make better decisions

When it comes to keeping an eye on working capital and cash flow management, technology is changing how treasury functions operate, with greater transparency and visibility from real-time analytics allowing better sight of where cash is sitting.

“We have things like ISO20022, the new payments standard, which will enable greater richness of data around payments,” says Naresh. “It means when money comes in, you can allocate it more quickly and get better visibility on operational balances and free cash.”

He adds that the greater use of APIs and the arrival of Open Banking makes it easier to access banking information, create and look at dashboards across different banks and various accounts to increase visibility of your cash position. 

Above all new technology is speeding up markets and transactions. “Technology will be an enabler, making whatever we were already doing quicker, better and more efficient,” says Naresh. “That means looking at who you have money with and looking at approaches to managing counterparty risk and making sure that you are not taking any greater risk than you should.”

Deposits versus other instruments

These evolutions in technology and standards are happening at a time when record sums of cash are being put into money market funds (MMFs). In the US, total assets in MMFs grew to more than $5.7trn in November  – an all-time high. Diversification in how liquid funds are invested became more urgent earlier this year following a bout of turmoil in the banking sector.

“That encouraged people to look at diversification of assets,” says Aggarwal . “They started to look at not just using deposits with their main relationship bank, which concentrates a lot of risk with one or two institutions, but about looking further afield.”

That may involve placing deposits with non-relationship banks or looking at money market funds as an alternative. “The turmoil reinforced considerations around who to borrow from and deposit with should be different. Don’t use the same lens to do both sets of analysis. You may come to the same conclusion, but you shouldn't apply the same analysis to both.”

For Stuti Saksena, an Economist and Vice President at NatWest, the impact of the banking sector turmoil experienced in the US in March last year were felt much less in the UK’s financial sector. She says: “While UK households and firms did pull out some of their bank deposits and move them into alternative assets such as MMFs in case of corporates and NS&I in the case of households, the outflows have notably subsided. We expect to see more of the same over ’24, thereby allowing for a steady recovery in the deposit base.” 

Surveying the landscape, and keeping cash at hand

While few economists are now predicting a UK recession in 2024, Naresh says the economy remains vulnerable to shocks. The next 12 months will see a lot of potentially disruptive events, he adds. “We've got elections in the US next year and possibly in the UK as well. We've also got European Parliament elections.

“The broader geopolitical environment will remain subject to change, but it also means the direction of interest rates and government spending will potentially change. That will affect inflation expectations and interest rates generally.”

For Naresh this ongoing uncertainty in the economy is the biggest long-term challenge to treasury teams. The broader general macroeconomic environment is just not hospitable for a lot of businesses, and he says it is affecting how they view investment decisions. 

“Even though headline inflation has fallen, inflation in different sectors and different parts of the economy is quite high. It's not like the whole story is over now.”

If that means more firms want to keep a little more cash on deposit, then at least with interest rates potentially staying higher for longer businesses may get better returns on what they do deposit. As he puts it: “People may well keep a little bit more squirreled away than they may have done otherwise.”

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