Charity experts have said the Bank of England’s interest rates rise this week presents both advantages and disadvantages for charities, with those holding cash reserves set to benefit most.
At a meeting ending on 4 November, the bank’s monetary policy committee voted to increase the base rate for the first time in three years by 0.25 percentage points to 4%.
Explaining the rise, the Bank of England said raising the bank rate “should help limit how far higher energy costs feed into prices in the economy more generally”.
However, Richard Hunt, chief commercial officer at CAF Bank, said increasing interest rates were a “double-edged sword” for charities.
“Increased borrowing costs will add to the pressure on organisations already contending with higher costs and growing demand, potentially making vital investment more difficult,” he said.
“Higher rates also make it increasingly important for charities with cash reserves to review where their money is held and the return it’s earning.
“In a difficult financial environment, every pound matters, whether that means securing a competitive return on reserves or ensuring borrowing remains affordable over the long term.”
‘Another squeeze’ for most charities
The Bank of England began raising interest rates at the end of 2021 to help control inflation, with the rates last increasing from 5% in July 2023 to 5.25% in August 2023.
After inflation fell and the pressures that caused price rises eased, interest rates began to fall in August 2024.
However, factors such as the ongoing conflict in the Middle East and continued rise in global energy prices have pushed up inflation in the UK, prompting this week’s rates rise.
Jon Franklin, co-chief executive at economics think tank PBE, said the increase may bring welcome returns for charities and funders sitting on significant endowments.
“For most charities, though, this is yet another squeeze: demand for their help is rising as households struggle with the cost of living, while their own costs are soaring and the incomes they rely on are increasingly under pressure,” he said.
“The bank is effectively turning down the heating because the energy bill has gone up. The aim is to cool demand across the economy and stop higher energy prices feeding through into wages and prices elsewhere.
“That might be relatively painless in a warm economy, but turning the thermostat down now, when the economy is lukewarm at best, risks leaving households, businesses and charities out in the cold.”
Charities with cash reserves set to earn more
Fiona Gillespie, head of charities (Scotland) at wealth management firm Rathbones, said the immediate impact of an interest rate rise is not necessarily negative for many charities.
This is due to many having little or no debt and holding “meaningful cash and short-term reserves, which should benefit relatively quickly from higher interest rates”, she said.
“That provides some welcome additional income on money held for near-term spending or as a contingency. The more difficult effects are likely to be felt indirectly.
“Higher rates can weigh on household confidence and disposable incomes, potentially making people more cautious about charitable giving, while continued cost-of-living pressures may increase demand for charities’ services.”
Stuart Freeman, lead investment manager for cash at CCLA, said higher interest rates offer charities with cash reserves the opportunity to earn more income from those assets.
“Cash reserves are there for a reason, and accessibility and prudent management remain paramount, but cash should also be working as effectively as possible for beneficiaries,” he said.
“With the possibility that bank rate could rise further, the income available from well-managed charity cash reserves has become increasingly meaningful.
“Every additional pound of income generated from reserves is another pound available to help charities deliver their missions at a time when their resources remain under considerable pressure.”
