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With the Ukraine conflict exacerbating food and energy price rises and contributing to inflation, which has proven far more stubborn than experts predicted, there are fears of another recession. Across the US, Canada and the UK, the last 30 days have been a month of aggressive interest rate hikes, signaling an important time to ensure the cost of cash operations is optimized.
The Federal Reserve implemented the first half-point percentage interest rate increase since 2000 on May 4th, at the first back-to-back meetings where rates were increased since 2006. It also signaled that there is the possibility rates could be hiked by a half percentage point at the next two meetings, but talked down increases of 0.75%.
On May 11th, the US dollar decreased in value as inflation remained high, but there is still some optimism that it is transitory. Data showed that CPI climbed to 8.3%, which was higher than the predicted 8.1% but below 8.5% the prior month – suggesting that inflation may have reached a peak but is unlikely to settle quickly.
Figure 1: US Inflation (CPI) – January 2020 to April 2022
On May 10th, the Bank of Canada provided forward guidance by announcing higher interest rates were on the way, with experts postulating that rates are to be increased by a half-percentage point at the next meeting, and hinting that the policy rate could reach 3%. This was following rate hikes on April 13th, where rates were increased to 1%; like the US, it’s biggest single move in more than two decades.
The Bank of England raised interest rates by 25 basis points to 1% on the 5th May, its highest level in 13 years. While this was the majority decision, the minority on the Bank of England’s Monetary Policy Committee had voted for a larger rate rise of 50 basis points. There is a growing consensus that interest rates will need to go higher to tackle inflation in the UK, with some ex-policymakers warning of levels of 4% or higher.
Further hikes are expected from all three central banks at meetings later through the year. This represents a challenge for banks and credit unions in terms of the rising cost of cash. However, it also highlights the importance of operational agility in cash operations and the ability to quickly implement scheduling and process changes, given that rates have not risen at this pace in recent years.
Optimizing your cash operations in response to rising interest rates is vital for banks and credit unions over coming months. This includes the foundation of optimizing the tradeoff between holding cash and delivering cash through robust forecasting and optimized armored transport schedules. Furthermore, multi-denomination and residual management strategies can be a significant source of savings – and should not be overlooked, particularly when the end to the interest rate hikes does not appear to be in sight.