Over the last couple of years, the UK’s official bank rate (OBR) has risen from 0.10% to 5.25% at the time of writing. There could be another rise to come, but most observers and indeed the Bank of England, which sets the rate, expect that we are near if not already at the peak of rates for this cycle. Nobody knows for sure how long interest rates will stay at their peak before coming down again, but there’s a wide consensus that when that happens, they will not fall back nearly as quickly as they have risen.
Higher interest rates make life tougher for households and businesses. That’s what they are intended to do – the aim being to reduce the level of demand in the economy and thus squeeze out excess price inflation. The cost-of-living crisis and a new interest rate environment have placed renewed pressure on many charities’ budgets as they think about how the cost-of-living crisis is affecting beneficiaries and their own staff and donors. Organisations with long-term investments have been reminded how higher and, especially, rising interest rates can damage asset valuations, even if their portfolio’s underlying earnings have held up fairly well.
One element of charity resources can, however, benefit when interest rates are higher: cash deposits. For the first time in well over a decade, you should be able to get a meaningful income from your cash balances.
But this probably won’t happen automatically. Whilst interest rates on mortgages and other lending have followed the upward trajectory of the official bank rate, banks generally haven’t been in a hurry to pay much higher rates to their depositors, especially those using easy-access bank accounts. This mismatch has been conspicuous enough to result in leading banks being called in by parliamentarians and regulators to explain themselves.
And it seems that charities have had a particularly poor deal, perhaps because they do not present the same opportunities for cross-selling of loans and investment products that the banks can find in the market for individual account holders.
There is an alternative
So if the interest your organisation’s bank is paying you on your day-to-day cash balances is only a fraction of the OBR, is there anything you can do? Many charity treasurers and finance managers find that cash funds prove an attractive option. Deposit and money market funds, some of which are exclusively available to charities, are an efficient and low-risk way to access interest rates that are much closer to the Bank of England’s headline rate.
Using a pooled cash fund means that you are not lending directly to an individual bank or building society, so your investment wouldn’t be covered by the deposit guarantee scheme which protects balances of up to £85,000 in the unlikely event of a bank failure. This doesn’t require you to compromise on risk control. On the contrary, the main objective of deposit and money market funds is to keep investors’ capital secure while maintaining easy access for withdrawals. They typically do this by placing cash in deposits and other cash instruments across a wide spread of carefully screened banks.
These professionally managed funds are able to assess and monitor the credit quality of borrowing institutions across the market. They will have controls such as limits on the size and length of funding that can be placed with any one bank.
Diversifying the fund’s assets across a large number of high quality borrowers is an important way in which managers seek to ensure that the fund’s capital is secure and that depositors are able to withdraw their cash without notice. In fact the credit rating of a pooled cash fund – something that you should ask about when researching funds – will often be higher than that of any individual bank to which you might lend directly.
But at the same time, with the benefit of its institutional status and by being able to place some of the cash for longer periods than just overnight, a pooled cash fund will often be able to offer its investors yields much closer to the OBR. This should be welcome news for trustees and executives seeking to make effective use of their charity’s financial resources.
Heather Lamont is director, client investments at CCLA
Related Articles
