Leveraging Technology on the Buy-Side in Planning for Higher Interest Rates and Restricted Bank Lending

interest rates

Throughout this series, we have explored the role that the risk of rising interest rates and reduced bank lending to small and medium-sized businesses is likely to play in driving up supply risk, along with some of the foundational procurement-centric technologies that can help. Today, as we conclude this exploration in the final installment of this series, we’ll highlight just a few of the trade financing techniques and technologies that can help procurement organizations play a leadership role in proactively preparing for and addressing supply risk.

A Technology Foundation to Reduce Supply Risk With Higher Interest Rates and Restricted Bank Lending

supply risk

The combined specter of rising interest rates, reduced bank lending to small and medium-sized businesses, demand/supply variability and economic growth prospects in a number of European and Asian countries – most notably China – suggests a rather dangerous supply risk cocktail is brewing for procurement organizations.

In the first installment of this series, I provided an overview of why these challenges matter and can contribute to supply risk. Today, I’ll share how specific solutions can help address these challenges – and build into applying trade financing techniques in the most targeted and strategic manner.

Planning for Higher Interest Rates and Restricted Bank Lending: The Impact on the Supply Chain

interset rates

While the recent market correction may call into question the Fed’s expected trend to raise interest rates, it is inevitable that interest rates are going to climb in the coming years – the question is “when” and not “if.” But whether a rise in rates is combined with further restrictions on lending to small (read: risky) businesses due to the need to maintain more conservative lending standards – thanks to the latest Basel III restrictions – is perhaps just as important a question to ask.

Certainly, even a double whammy of higher interest rates combined with restrictive bank lending could have a significant impact on the ability of suppliers to access capital on reasonable terms. In the coming weeks on Trade Financing Matters, we’ll explore the potential impact of these challenges as well as potential approaches to proactively reduce supply chain risk. Today, we’ll start by tackling how such a climate could impact suppliers – and procurement.

What Happens to Self-Funding Early Pay Programs When the Fed Raises Rates? Part I

Federal Reserve Bank of Boston President Eric Rosengren recently commented that all but two on the Federal Open Market Committee felt raising rates sometime near the end of this year is necessary. He mentioned two conditions the committee has for raising rates: the continued improvement in labor markets and that Fed members are reasonably confident that inflation gets up to 2%. So far the second condition is not being met, according to Rosengren. Basically, the Fed is leaving lots of room to hedge. Core Personal Consumption Expenditure (PCE) inflation is 1.2%, so the Fed needs more evidence. Maybe that evidence will be labor markets tightening and wages rising, but as we know, there is slack in the system, given many have dropped out of the labor force. Regardless, the Fed has made its intention on raising rates, and when that happens, the leverage in the system, even if rates go up 25bps, will have dramatic impacts on corporate balance sheets and possibly companies' ability to self-fund.