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What do neutral rates mean for cash management?

Neutral rates are defined as the level that neither encourages nor deters overall economy activity in a particular country.

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With interest rates in the United States and Europe set to remain above the lows of the previous decade for some time to come, we examine the liquidity considerations facing investors as they manage cash exposures. As recent years demonstrate, predicting the medium to long term path of interest rates, not least during periods of heightened geopolitical turmoil and uncertainty around global trade, can be a significant challenge.

Central banks in the US, Eurozone, and UK have started to ease monetary policy. Interest rates on both sides of the Atlantic are expected to stabilize at a 'neutral' level, which is expected to be higher than the almost zero rates seen after the Global Financial Crisis in 2008.

What are neutral rates?

Neutral rates are defined as the level that neither encourages nor deters overall economic activity in a particular country. While major central banks in the West raised interest rates in 2022 and 2023 in order to bring inflation under control, they are in the process of reducing them to a more balanced level – where borrowing costs are not so high that they may likely inhibit economic growth, but not so low that they may generate further rises in inflation.

The approach taken by policymakers has been complicated by macroeconomic as well as political factors. For example, economic growth in the eurozone has been weak in comparison with the US, and this has led the European Central Bank (ECB) to cut rates at a relatively rapid pace, taking the main depository interest rate to 2.00% by June 2025.1

In the UK, the Bank of England (BoE) has continued to lower the base rate, reducing it to 4.25% by May 2025.2 But further cuts are thought to be dependent on factors such as the future path of UK inflation, which is forecast to rise later in 2025, as well as domestic economic growth and the global political situation.3

Meanwhile, although the US Federal Reserve (Fed) had been expected to reduce rates in early 2025, the resilience of the US economy, combined with uncertainty around the scope and impact of President Trump’s international trade policies, has led Fed Chair Jerome Powell and his colleagues on the Federal Open Market Committee (FOMC) to take a more cautious stance.

As of July 2025, the Fed funds rate in the US was in the range of 4.25%–4.50%, while the uncertainty surrounding President Donald Trump’s tariff policies has led policymakers to suggest that there is a diminishing likelihood of multiple interest-rate cuts this year.4

Cash management strategies when rates are neutral

The prospect of interest rates finding a new equilibrium in the range of 2%-4% means that investors remain under pressure to carefully manage their cash holdings.

Meanwhile, investors who have portfolio exposure to US dollars, Sterling and/or Euros may benefit from working with an investment manager that can keep money markets and central bank activity under constant review to try to mitigate the risk associated with interest-rate movements and other significant financial-market developments.

When rates are at or close to neutral levels, there may be a number of further liquidity considerations for investors:

By holding a combination of assets, ranging from government debt and repurchase agreements (repo) to commercial paper and certificates of deposit, may help mitigate concentration risk.

In an environment of economic uncertainty, maintaining flexibility through diversified exposures and duration positioning may be helpful in mitigating short-term rate fluctuations.

Investors are likely to be subject to rules that oblige them to maintain minimum liquidity levels.

While MMFs may seek yield enhancement, they also introduce greater duration risk. Investors should balance objectives with capital preservation and liquidity needs.

What are money market funds (MMFs)?

MMFs are a cornerstone of institutional liquidity strategies, typically seeking blend of capital preservation, daily liquidity and yield potential. MMFs typically invest in a diversified pool of high quality, short-term instruments, including but not limited to sovereign and corporate debt, repos, and time deposits, while adhering to stringent regulatory and credit standards depending on the type of MMF. Diversification does not assure a profit and may not protect against loss of principal.