Three key financial call outs for boards and directors

After two years of heavy interest rate increases and the battle against inflation, 2024 will be a major year for company directors in managing financial resources. Here are three major calls out in managing financial resources to a better outcome for directors, owner directors and employees.   

Deposit and Borrowing Interest Rates

The interest rate environment will see a significant change in the second half of 2024, with 0.5% to 0.75% cuts in Euro-zone interest rate before the end of the year.

Borrowing costs will decrease toward the back of the year but there will also be a knock-on impact to deposit rates. Corporates have built up nearly €40 bn in cash since 2017 to €100bn, mostly sitting at zero rates. Well positioned medium sized corporates and SME’s with cash resources now face a window where higher rates for deposits available today are likely to decline through 2024.  There is a need to lock in available rates and review current commercial rate offerings to maximise the return from any surplus cash positions in the corporate balance sheet.

On the borrowing side, pressure from higher rates will ease toward the back of 2024, providing opportunities to refinance at lower rates. On mortgages, competition is most intense on personal mortgages and rates are now declining with an additional boost from the ECB coming in September with a cut in the tracker rate by 35 bps ( which closes the refi rate and the deposit rate to 15bps from 50 bps today).

Pensions

There is a major opportunity for companies to build existing or new pensions ahead of moves on compulsory autoenrollment rollouts. Since 2023, a company can top up a director or employee’s PRSA contributions, without traditional limits, providing a major window to move wealth in a tax efficient manner to individuals within a pension environment, particularly for owner directors.  

In addition, the higher yield environment, backed heavily by stronger yielding bonds, provides a much stronger environment for lower risk pension investment. While long term pensions ( 10 years + to retirement) should maintain the traditional high equity market component, those with pension maturity of 5 years or less can provide a major top up under the PRSA company option and also avail of a much safer portfolio with a higher yielding bond component.  

Energy Costs

Crippling energy bills in the Irish market have yet to see the major downward move which would reflect where current market rates are trading for the major energy commodities. Energy prices have set for a significant reduction in the coming quarter as gas prices continue to decline in Europe. Very advisable to review energy rates on offer from a much more competitive energy supply market as prices fall.

On the negative side, prices at the pump for petrol and diesel face more upward pressure, with the significant 14% rally in the oil price since the start of 2024, the impact of which will be compounded as the dollar continues to gain strength against the euro.  Following the lifting of Government relief on excise duties, which alone will increase by 8c per litre for petrol and 6c per litre for diesel, strong oil prices and a strong dollar, will drive pump prices back above 180c a litre.  

Finally, as banks introduce larger incentives for higher energy ratings, it is time to assess both the energy rating of homes, but also premises. Corporate Sustainability Reporting Directive (CSRD) requires corporates to report CO2 emissions, including that of premises, and will eventually provide an opportunity for companies in availing of cheaper borrowing rates from green lending offerings in the banking sector.  The roll out of green mortgages for individuals will eventually move to the corporate sector in the year ahead. Investment in preparation of CSRD will bring additional benefits to borrowing costs and potential to avail of Government incentives to retrofit premises to higher energy ratings.