Longer term funding rates are starting to creep up
Inflation is likely to be the main concern facing companies this year, both in finance and elsewhere.
The Bank of England has already started rate hikes and the US Federal Reserve is signaling three rate hikes this year to contain rising inflation.
Although the European Central Bank has announced that it does not intend to raise interest rates this year, longer-term rates suggest that medium-term rate hikes are imminent.
“The most important thing is what will happen to longer-term rates – three- and five-year rates – because they will rise before base rates,” said John Finn, managing director of Treasury Solutions.
He referred to the UK, where the cost of financing for three years has increased from 0.15% to over 1% in the last 12 months.
The Bank of England raised its key interest rate from 0.1% to 0.25% at its December meeting.
âWe are starting to see in the euro zone that these three year rates are going up a little from where they were. Generally they crawl nine to twelve months before something happens, âhe added.
Anyone with a variable rate mortgage, for example, looks like they won’t see a rate hike this year, estimates John Finn, but he said that fixed rates would likely rise soon as the rates for fixing Corporate loans are already starting to rise.
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On the banking front, Finn said his biggest concern was the layoff programs banks are currently running and their impact on commercial banking.
âThey are shrinking depending on where you think their volume will be in the next five years. The problem is you are shrinking instantly, but the loan books only shrink over time – if that happens – so my concern is that it is shrinking too quickly, which means decision making may be too slow.
“My advice to companies on the credit side is to start early, identify the right person in the bank and approach them like things are going wrong in the economy,” he concluded.
Here the banking market is changing rapidly.
In addition to redundancy programs and the threat from financial technology companies (fintech), Ulster Bank and KBC are preparing to exit the market in the coming years.