In a significant move, the Federal Reserve has lowered interest rates by 50 basis points, marking the most aggressive rate cut since the financial crises of 2008 and 2000, respectively. This decision aims to ease financial pressures and stimulate economic growth amid signs of a cooling labour market and slowing global economic activity. The European Central Bank is likely to lower interest rates for the third time this year, arguing inflation in the euro zone is now increasingly under control and the economy is stagnating.

The prospect of rate cuts in 2024 is creating significant anticipation in the international business community. With central banks aiming to stimulate growth by reducing borrowing costs, businesses across borders are poised to feel the ripple effects. This analysis examines how rate cuts could influence international trade, foreign direct investment, currency markets, and multinational business operations.

This article is written by Mourad Seghir ([email protected]). Mourad is part of RSM Netherlands Business Consulting Services with a specific focus on Finance & International Trade.  

Impact on Global Trade and Investment

Lower interest rates typically lead to cheaper borrowing costs, which can be advantageous for multinational corporations seeking financing for cross-border expansion. Rate cuts by central banks in major economies can encourage international businesses to invest more in global operations, mergers, and acquisitions. In 2024, a rate cut environment could increase foreign direct investment (FDI), particularly in emerging markets where the need for infrastructure and industrial development is high.

With cheaper financing available, international companies might be more inclined to fund large projects such as manufacturing facilities, supply chain improvements, or research and development centres in foreign countries. 

However, this also comes with risks. Emerging markets that experience a surge in FDI may become vulnerable to sudden shifts in investor sentiment if economic conditions change rapidly, leading to capital outflows and currency volatility.

Currency Markets and Exchange Rate Fluctuations

Interest rate differentials are a key driver of currency values. When central banks lower interest rates, it can lead to depreciation of the local currency relative to other major currencies. For international businesses, fluctuations in exchange rates significantly impact revenues, costs, and profitability.

A weaker currency can make exports from a given country more competitive, as they become cheaper for foreign buyers. In 2024, rate cuts in economies like the United States or Europe could make their goods more attractive to international buyers, benefiting exporters. On the flip side, businesses that rely on importing raw materials or goods may face higher costs due to a weaker domestic currency, which can squeeze margins.

For multinational corporations, currency volatility poses operational risks. Effective currency hedging strategies will be crucial in mitigating these risks, as rate cuts are likely to lead to increased exchange rate fluctuations. Companies may need to reassess their foreign currency exposure and take advantage of financial instruments to protect against adverse movements in exchange rates.

Global Supply Chains and Financing Costs

Rate cuts can have a mixed impact on global supply chains. On one hand, lower borrowing costs can provide international suppliers and logistics providers with the financial flexibility needed to expand and improve their networks. This is particularly relevant in 2024 as supply chains are still adapting to the disruptions caused by the pandemic and geopolitical tensions. However, rate cuts can also have an indirect effect on supply chain stability. As businesses ramp up production and investment due to cheaper credit, demand for raw materials and shipping may increase, potentially leading to bottlenecks and increased costs in certain industries. International businesses must navigate these dynamics carefully to ensure that cost savings from lower interest rates are not offset by rising input or logistics costs. 

Implications for Cross-Border Mergers and Acquisitions

Lower interest rates often lead to a surge in cross-border mergers and acquisitions (M&A), as companies find it more affordable to finance deals. In 2024, we can expect increased M&A activity as businesses look to capitalize on favorable borrowing conditions to expand their international footprint or acquire strategic assets. This can be particularly beneficial for companies looking to gain market share or access new technologies.

However, the risk of over-leveraging is a concern. With interest rates falling, there is a temptation for companies to take on excessive debt to finance acquisitions, which could lead to financial instability if global economic conditions deteriorate or if interest rates rise unexpectedly in the future. International businesses must exercise caution in structuring deals to ensure they are not overexposed to interest rate risks.

Impact on Emerging Markets

For emerging markets, rate cuts in major economies like the United States and the European Union can lead to capital inflows, as investors seek higher yields in developing countries. This can be both a blessing and a curse. On one hand, increased investment can help spur growth and development in these regions. On the other hand, it can lead to economic instability if these inflows reverse suddenly due to changes in global financial conditions.

Emerging market businesses may benefit from lower borrowing costs as international capital becomes more accessible. However, they also face the risk of currency depreciation and inflation if rate cuts lead to excessive capital inflows. Central banks in these countries may need to balance attracting foreign investment with maintaining financial stability, which could involve interventions in the foreign exchange market or adjustments to domestic interest rates.

Financial Markets and Investor Behaviour

Rate cuts tend to boost equity markets, as investors move away from low-yielding bonds to riskier assets like stocks. For international businesses, this can be beneficial, as higher stock prices make it easier to raise capital through equity issuance. In 2024, rate cuts could lead to increased liquidity in financial markets, which can help multinational corporations secure funding for expansion and operations. However, international businesses must also be wary of potential asset bubbles. Persistent rate cuts could inflate asset prices, particularly in sectors like real estate or technology, where valuations are already high. Businesses operating in these sectors need to be mindful of the risks associated with overvalued assets, as a sudden correction in asset prices could have far-reaching consequences for their financial health.

Conclusion

Rate cuts in 2024 are likely to have a significant impact on international business, influencing everything from trade and investment to currency markets and supply chains. While lower borrowing costs can provide opportunities for growth and expansion, they also come with risks, including currency volatility, potential asset bubbles, and the risk of over-leveraging.
For international businesses, navigating this environment will require a careful balance between seizing opportunities for expansion and managing the financial risks associated with rate cuts. Effective risk management strategies, including currency hedging, prudent financial structuring, and a focus on sustainable growth, will be key to ensuring that the benefits of rate cuts are fully realized without exposing businesses to undue risks.

RSM is Thought Leader in the field of International Trade consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.