Interest rates
Following stagnation in the lending markets as a result of the 'credit crunch' and the economic slowdown, the Bank of England cut interest rates to their lowest level ever in March 2009 in an attempt to stimulate the economy and consumer spending and avoid deflation. Interest rates are expected to remain low well into 2011.
What are the implications?
- Increased stock market and currency volatility in response to changes in interest rates and uncertainty related to what effect quantitative easing will have on long term finances.
- Further increases to the supply of money to stimulate consumer spending by improving the supply of credit to reduce the risk of deflation and push the economy out of recession.
- Financial difficulties for VCOs dependent on investment income and those needing to build their reserves.
- Potential opportunities for VCOs to borrow money at current low interest rates and invest in the markets, although capital is still not easily available.
- However, the continuation of a low value pound and the risk of underlying long term inflationary pressures may instead build pressure for the BoE to raise interest ratesif economic recovery is not too far away.
- Benefits for first time buyers as there are more cheaper mortgage deals available as a result of low interest rates as well as for those on standard variable rates or tracker mortgages.
- Levels of individual giving may be affected if levels of disposable income decline as people lose money in their savings.
- The private sector is likely to have less spare money as a result of lower returns on investments which may affect levels of corporate giving.
Moving forward
This driver does not have direct implications for VCOs but it will impact on the other drivers listed below as well as many others. (There is often a relationship or interdependency between different drivers, which may be important to your organisation. As you scan each driver, it is important to think about its relationship or influence on others; if drivers are linked, then you need to think laterally to draw in all those that may be relevant.)
Consumption culture and personal debt
Increased consumer spending and confidence
However, here are some questions for your organisation to consider:
Low interest rates mean that any reserves or savings your organisation might have will be worth less. Are there other ways your organisation can preserve some cash?
- Could you stretch out the payments on bank debt to preserve cash? Re-financing existing loans early may give you greater financial flexibility.
- Could you generate more cash from existing operationssuch as finance, HR and technology or is outsourcing a cheaper option?
- Could you release some cash trapped in day-to-day operations by making sure any products ordered are forecasted and planned properly?
- What strategies can your organisation put in place now to manage potential future changes in funding?
- Can you diversify your income sources or work in partnership with other organisations?
- Are there tactics your organisation can use to make your income streams more resilient (for example by converting donors to regular, planning giving using monthly direct debits)?
Want to know more?
Published by: Office for National Statistics
Date: Monthly reports
Format: PDF
What is it? This is a useful regular report giving reliable financial statistics. It is based on official government statistics. Data on interest rates is on page 150 of the July 2009 report.
How useful is this? ONS data is subject to rigorous quality standards so the data in this report should be considered very reliable. The report is useful if the underlying financial figures are needed, for example in mapping trends or exploring relationships between organisational data and the broader financial context.
Other comments:
Interest rates: What the economists say
Published by: The Guardian, left-of-centre broadsheet
Date: June 2009
Format: Web
What is it? This article presents the views of numerous high profile economists on interest rates.
How useful is this? This provides a useful starting point to understanding the real-world implications of financial data. The article presents a range of economic opinions so concerns about the Guardian's political stance should not be a barrier to reading this article.
Other comments:
Interest rates cut means “sector will suffer in the short term”
Published by: Third Sector magazine
Date: January 2009
Format: Web
What is it? This article gives a brief account of how interest rates might affect the voluntary sector.
How useful is this? The article gives an outline of some of the key concerns that might arise. As such, it may be a useful starting point for exploring this driver. It would be less valuable later in the analysis when detailed data is needed.
Other comments:
Bank of England: http://www.bankofengland.co.uk
Financial Statistics
Published by: Office for National Statistics
Date: Monthly reports
Format: PDF
What is it? These are useful regular reports that provide reliable financial statistics. They are based on official government statistics.
How useful is this? ONS data is subject to rigorous quality standards so the data in this report should be considered very reliable. The report is useful if the underlying financial figures are needed, for example in mapping trends or exploring relationships between organisational data and the broader financial context.
Other comments:
Claimant map for unemployment
http://news.bbc.co.uk/1/hi/in_depth/business/2008/downturn/default.stm
Recent comments
Karl
Third Sector ForesightI think it’s debateable whether or not this does have direct implications for the sector. Its certainly the case that foundations will be impacted: remember they are in effect savers who live off the dividends and interest from their investments. So, an increase in interest rates will (ceteris paribus) increase their income. Which means they have more money to give to the frontline organisations reading this blog.
Balanced against that is the obvious fact that more organisations are borrowing. Loan terms vary and of course the foresightful (again, those reading this blog I hope) will have borrowed at fixed rates. For others, higher interest payments mean less to spend on charitable purpose.
The sector is, overall, a net saver. So, increased interest rates should lead to a direct increase in the sector’s income. However, the donor in the street might have less disposable income if they are paying more out on the mortgage. In other words, increased interest rates should lead to an indirect decrease in the sector’s income. What the Bank of England giveth they taketh away…
By the way, if you want to construct your own trend chart to show changes in the base rate you can copy all the figures from the BofE’s stats page
Stephen
Dear Karl,
We might want to give some thought to the secondary effects of lower interest rates.
Falling interest rates are dragging down annuity rates. Just to make the point, the annuity rates determine how much you gat each month from your pension.
So we have a situation arising where the population living on retirement income is set to rise dramatically (the Boomers are reaching retirement age), just as the amount they can live off hits all time lows.
Net result – low income pensioners for decades to come. That’s bound to have an impact on the ‘relief of poverty’ charities.
Best wishes,
Stephen
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