With speculation growing that the Bank of England could cut the base rate to below zero, what would negative interest rates mean for treasurers?

Earlier this month, Silvana Tenreyro, a voting member on the Bank of England’s Monetary Policy Committee, spoke in favour of cutting the UK’s official interest rate below zero. In an online speech, she argued that “negative interest rates should with high likelihood boost UK growth and inflation”, citing the experiences of other countries that have adopted similar measures. “Cutting Bank Rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus,” she added.

Of course, many other central banks have already taken the plunge to negative rates. “Over the last decade, many of our global corporate clients have had to manage their liquidity positions against negative interest rates on euro, Japanese yen and certain Scandinavian currencies amongst others,” notes Henrik Lang, head of Global Liquidity, Global Transaction Services at Bank of America.

The fundamental difference between low rates and negative rates is that whereas positive rates earn a yield, negative rates incur a cost. “The situation has become so commonplace in certain regions that it’s an expected line item and part of a corporate’s financial forecast and budget,” Lang comments. But beyond the most obvious impact of negative rates, there are also some other implications that treasurers should be aware of. As Lang explains, these include the following:

• Operational and system readiness. “A corporate’s ERP or TMS system may not be configured to accept negative values, and instead assume that every dollar deposited will retain its value,” says Lang. “Corporate treasurers need to speak to their technology vendors to ensure their systems won’t be interrupted should the deposit principal go negative.”
• Policies guiding treasury and cash investments. As Lang explains, many companies have board-approved policies guiding investments and treasury activities, including how to manage excess capital. “It’s very typical for those guidelines to stipulate that excess capital cannot be put at risk,” he says. “Unfortunately, negative interest rates might make that impossible. As a result, treasurers should review their guidelines to ensure that their cash investment plans won’t be stymied by a changed macro environment.”
• Tax and accounting treatment. “From an accounting perspective, negative interest rates can show up as a fee or an interest expense,” says Lang. “Treasurers should seek advice from their tax accountants for guidance on where to book the expense on their general ledger.”

Another consideration is the impact of negative rates on money market funds, which are used by many treasurers for short-term investments. In a previous Treasury Today article, Natalie Cross, Senior Client Portfolio Manager at Invesco, explained that following the recent reform, negative yielding money market funds are no longer able to offer distribution share classes: “For those funds, clients would only have the option of accumulation classes. These operate slightly differently from distribution classes, while still very much remaining part of the fund, with identical fee levels.”

Optimising capital

While negative interest rates would certainly present some challenges for corporate treasurers, Lang argues that one silver lining is the push it provides to further optimise capital. “A corporate’s treasury priorities will typically shift from yield on excess cash to safety of capital, access to liquidity and efficiency,” he says.

As such, Lang explains that a negative interest rate environment offers a good opportunity for corporates and their bank providers to explore and implement new and innovative technologies that can “improve visibility and accuracy of liquidity forecasts of both positive and negative interest rate positions.” In addition, Lang notes the benefits of leveraging physical and notional pooling arrangements as well as virtual account structures: “These solutions will minimise overdrafts and allow for self-funding wherever possible.”