The recent welcome drop in UK inflation has given corporate treasurers breathing space, but it doesn’t take away from an unforgiving wider economic backdrop. The latest wave of hostilities in the Middle East has propelled oil prices northwards once again and the risk of another inflation shock hasn’t gone away. The IMF’s latest World Economic Outlook says that global headline inflation is expected to increase to 4.7% in 2026, up from 4.1% in 2025, revised upward from its April analysis.
The risk is certainly real. Conflict continues to grind in Ukraine and Russia, the Middle East has no off ramp and deglobalisation continues. All of these events are inflationary and come faster than technology can address supply issue
Higher inflation brings a raft of treasury headaches that require fresh scenario planning to factor in higher input costs, slower consumer demand and a spike in borrowing costs and FX risk if interest rates go up. Preserving cash held for liquidity and working capital also becomes more complicated. In an inflationary environment, cash earns little or no return and its purchasing power falls over time. Meanwhile, existing bond portfolios lose value if interest rates rise.
“The risk is certainly real. Conflict continues to grind in Ukraine and Russia, the Middle East has no off ramp and deglobalisation continues. All of these events are inflationary and come faster than technology can address supply issues,” reflects Daniel Wong, group treasurer at British American Tobacco. The tobacco company hedges both FX and rates to manage volatility triggered by central bank policy or economic growth. His treasury team also steps up efficiencies to “squeeze working capital” in inflationary environments to mitigate poor returns on cash.
Access and safety are the priorities. For the most part, holding cash safe until capital repatriation is the focus
Wong adds that corporate treasurers’ strategic cash buffers vary depending on specific demands. This can include factors such as covenants – companies with tighter covenants may need larger cash reserves, for example – access to funding and speed of funding if a company needs to raise money through banks or the capital markets. “If you operate in a stable environment with good access to funds, cash buffers can be very low. Currently, the capital markets and banking system remain robust.”
He also argues that for many treasurers, returns on cash are not the priority. It’s liquidity, security and lastly yield that treasurers care most about, he says. “Access and safety are the priorities. For the most part, holding cash safe until capital repatriation is the focus.”
There is always the drive to use cash as efficiently as possible by paying down debt and making sure it never sits idle
Ben Walters, head of corporate finance at Robert Walters, says cash at the global recruitment company is akin to inventory, used in regular cycles to fund payroll books for the company’s clients. This way, cash is used actively within the business and return comes in the form of fee income and operating profit. Still, he says: “There is always the drive to use cash as efficiently as possible by paying down debt and making sure it never sits idle.”
Walters’ focus is more on inflation affecting client and candidate confidence. Indeed, he believes inflation in many businesses hits the top line and the cost base to a greater degree than moves in interest rates. “My personal view is that higher and more volatile inflation than we are used to is here to stay, driven by an uncertain macro environment and the long-term effects of climate change on global resources.”
Sarah Rundell is a financial journalist writing across institutional investment, financial markets and corporate treasury
