Resources | Market Trends | March 4, 2022

Interest Rate Hikes Are Back — What Does the Rest of 2022 Look Like?

It’s finally happening: Interest rates are starting to rise again as central bankers try to slow the pace of inflation.

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It’s finally happening: Interest rates are starting to rise again as central bankers try to slow the pace of inflation.

US Federal Reserve Chairman Jerome Powell has indicated he plans to seek a 0.25% increase when the Fed meets in mid-March, following a similar move by the Bank of Canada on March 2. The European Central Bank and the Bank of England are looking at rate hikes in the near future, too.

For Chris Atkins, senior vice president of C2FO’s Capital Finance, the rate increases are important because they signal that central bankers — and the Fed specifically — acknowledge that inflation is persistent and must take action now to reduce it. 

“In 2021, the Fed’s common refrain was that inflation is transitory,” Atkins said. “What we’re seeing is that it’s not transitory.”

The C2FO Outlook  Based on its proprietary data model, C2FO estimates that inflation continued to grow rapidly in February.  U.S. Producer Price Index (PPI) 10.2% increase YOY in February •	vs. 9.7% increase in January   US Consumer Price Index (CPI) 8.1% increase YOY in February •	vs. 7.5% increase in January US Retail Sales 16.9% increase YOY in February (non-seasonally adjusted)

C2FO’s model encompasses more than 900 million invoices that were loaded into its platform. (The retail sales projection is based on data from a subset of the categories that C2FO tracks: general merchandising stores, clothing stores, grocery stores, building materials, health and personal stores, miscellaneous stores, sporting goods and ecommerce.)

“We’re seeing average invoice amounts growing across the board,” said Aditya Devurkar, C2FO’s senior vice president of data science. “And we’ve found that invoice size has a correlation with inflation trends.”

The Bureau of Labor Statistics will release its official update on the consumer price index on March 10 and the producer price index on March 15. 

It’s unclear how fast rates will increase going forward

Economists have been anticipating a rate increase at the Fed’s March meeting for months, with the expectation that multiple hikes are on tap for 2022. 

For example, JPMorgan predicted nine rate increases totaling 225 basis points through March 2023. During a recent webinar with C2FO, UMB Bank director of research Eric Kelley said the fed funds and prime rates could increase by 150 basis points by the end of 2022. C2FO believes the increase will be somewhere between 150 and 225 basis points for 2022.

Russia’s invasion of Ukraine — along with the uncertainty it generates and the high humanitarian cost — could force policymakers to rethink how much and how quickly they raise rates, at least in the short term. 

The trend is still for higher rates, though:

  • The European Central Bank may not raise rates until September, Reuters reported. And that increase is likely to be milder — maybe 10 basis points, out of a total of 30 forecast for this year. 

  • The US Fed may have to act more aggressively in future months if inflation doesn’t abate as Powell expects. At one point, there was talk that a 0.50% increase could be possible for March. The rate futures market had that as a 70% likelihood a few weeks ago

  • The Bank of Canada, which raised its interest rate by 0.25% in early March, expects to see inflation continue to rise, in part due to the Ukraine crisis.

  • The Bank of England is expected to raise its rates by 0.25% during its March 17 meeting, following hikes in December and February. 

What should your business do now? 

Even if interest rates don’t increase as quickly as expected, the cost of borrowing for businesses will probably go up this year. In the Fed’s mind, that should curtail credit growth and reduce consumer demand, which will reduce inflation. 

But it’s also likely that, for all of 2022, costs will continue to rise above the Fed’s target of 1% to 2% inflation, forcing businesses to raise prices, Atkins said.

It’s crucial for businesses to continue to stay in close communication with their suppliers and get immediate updates on any potential cost increases, so they can adapt and increase pricing to their customers, he said.

“Don’t be the business that gets squeezed,” Atkins said. “Don’t be the ones that are caught unprepared for it.”

The other danger for businesses is that higher rates could make it harder to access affordable capital, either for sustaining operations or growth opportunities. Businesses with tight cash flow could find themselves pinched if their costs increase or if they face some other unexpected expense.  

One solution: Businesses should take control of their cash conversion cycle (CCC), the number of days it takes to turn cash into goods or services, then into sales and back to cash again. 

A shorter CCC is key for adapting to higher prices. By pulling cash forward — getting paid faster — you can reinvest that money back into inventory, raw materials and other inputs before inflation makes those things even more expensive. 

The longer it takes to get paid, the less buying power you will have when those funds eventually make their way to you because, while you’re waiting, inflation is pushing your costs higher and cutting into your profit margins.  

One way that businesses can accelerate their cash conversion cycle is by offering discounts for early payment, which can reduce the time spent waiting for payment. For example, the dynamic discounts offered in C2FO’s Early Payment markets are, on average, less expensive than the cost of higher inflation. 

By taking control of when your invoices are paid by customers, you can increase your ability to navigate this unusual market. 

The bottom line

If current trends hold, interest rates will increase this year by 1.5% to 2.25% in C2FO’s estimation. That should eventually mean relief from inflationary pressures, but in the meantime, smart businesses will actively manage their cash flow and supply chain to give themselves as much maneuverability as possible. 

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