What do CFOs think about interest rates?

Interest rates have been rising sharply around the world over the past 18 months, as central banks attempt to keep inflation under control. What effect are these hikes having on business confidence?

In June the governor of the Bank of England, Andrew Bailey, warned the annual conference of the European Central Bank that financial markets were unprepared for the extent of the interest rate rises required to curb inflation.

“The market thinks we’re nearly done. They’ve got a number of further increases priced in for us. My response to that would be: well, we’ll see,” he said.

It may lack the definitiveness of Mario Draghi’s infamous 2012 “whatever it takes” speech, but Bailey’s intent was still clear. And the Bank of England’s monetary policy committee has since duly delivered more rate rises, taking the base rate to 5.25%. It’s now the highest it has been in 15 years.

That has significant implications for business. The main issue, of course, is that the cost of borrowing increases as rates rise. This will increase businesses’ expenditure, at a time when growth remains low and consumers are likely to be reining in their spending.

The risk, then, is that rising rates squeeze us into a recession. It’s a fear shared by many CFOs who, according to a survey by Deloitte, are clearly concerned about the number of warning lights flashing on the UK economy’s dashboard.

As we can see here, CFOs’ level of concern about rising interest rates broadly tracks the rise of the rates themselves. But with 87% of CFOs now feeling that interest rates are “very high” or “quite high”, it’s clear that a certain level of anxiety is accompanying this.

And that anxiety also seems to materialise in CFOs’ concerns about their businesses’ financial prospects.

Naturally, amid this grim outlook, most CFOs have fairly similar priorities: keeping costs down and ideally increasing cash flow. 

How they will go about achieving that, though, could vary significantly, given the different levers available in certain industries and the variations inherent in companies’ existing financial situations.

When it comes to the financial levers available to them, CFOs broadly agree that there’s little likelihood of the cost of borrowing coming down any time soon. That, they recognise, will probably hurt their businesses’ cash flow over the next 12 months.

There are clearly challenging times ahead, then. Like the finance industry itself, CFOs across all sectors of the economy will undoubtedly be on the lookout for more comments from Bailey to indicate just how long the interest rate rises will continue. 

The big question, though, is whether the Bank of England will manage to avoid tipping the UK into recession in the process.