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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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Over the past five years, central bank policy shifts have reshaped the cash landscape - and money market funds (MMFs) have been at the center of it all. During the Covid pandemic, MMFs provided stability when markets were under stress. As rates surged in 2022-2023, they became a top destination for yield - with policy rates in the US and UK peaking above 5% and around 4% in the Eurozone - driving record inflows and reinforcing their role as a strategic cash solution. Even as rates cut, MMFs remain essential for liquidity management and capital preservation, offering flexibility and innovation through enhanced structures and regulatory safeguards. In a world of uncertainty, MMFs continue to deliver what matters most: liquidity, stability and yield - in that order.

Predicting the medium to long-term path of interest rates, particularly during periods of geopolitical turmoil and uncertainty around global trade, remains a significant challenge. What liquidity considerations face investors as they manage cash exposures during a period of neutral rates?

What are neutral rates?

After raising rates aggressively in 2022–2023 to tackle post-pandemic inflation, major central banks are now in a gradual normalisation phase. Policy rates in the US, UK and Eurozone have moved down from their recent peaks but remain positive in real terms and close to, or slightly above, most estimates of “neutral”.

In the euro area, the European Central Bank (ECB) has reduced its deposit facility rate to 2.0%, after cumulative cuts of two percentage points since mid-2024. In the UK, the Bank of England (BoE) has lowered Bank Rate from a 16-year high of 5.25% to 3.75%. In the US, the Federal Reserve (Fed) has begun easing from its 2023 peak of 5.25%–5.50%, bringing the federal funds target range down to 3.50%–3.75% by late 2025.

At these levels, policy is still mildly restrictive in many models, but far from the extremes seen during the zero-rate era or the 2022–2023 tightening peak. Estimates of the nominal neutral rate cluster in a range of roughly 2.0%–4.0% across major developed economies, implying that current settings are closer to the “steady-state” regime that many investors associate with neutral rates.

However, the path back to neutral has not been smooth. Differences in growth, inflation and fiscal policy across regions, alongside persistent geopolitical tensions and renewed uncertainty around global trade, have produced asynchronous rate cycles. For example, softer growth in the Eurozone has justified faster cuts by the ECB, while the Fed and BoE have moved more cautiously as they balance still-elevated inflation against slowing activity.

Cash management strategies when rates are neutral

The prospect of interest rates finding a new equilibrium in the range of 2.0% to 4.0% means that investors remain under pressure to carefully manage their cash holdings.

For investors with exposure to US dollars, sterling and euros, working with a global cash manager that can continuously monitor central bank policy, yield curves and money-market conditions across regions can help manage the risks associated with interest-rate moves and other significant market developments.

When rates are at or close to neutral levels, there are several liquidity considerations for investors:

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

In an environment of economic uncertainty, maintaining flexibility through diversified exposures and duration positioning is essential to navigating short-term rate fluctuations.

Investors are likely to be subject to rules that oblige them to maintain minimum liquidity levels. Investors may benefit from the pooled liquidity provided by a MMF which generally offers same or next day access to invested funds.

While longer-dated instruments may offer yield enhancement, they also introduce greater duration risk. Investors should balance return objectives with capital preservation and liquidity needs. The active management of MMFs allow them to be dynamic and react to changes in markets. This can lead to the potential for enhanced yield.

How money market funds may meet investor needs

MMFs are a cornerstone of institutional liquidity strategies, offering a blend of capital preservation, daily liquidity and yield potential.

These funds 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.

  • Short-term MMFs are ideal for operational cash, offering same-day settlement and ultra-low volatility.
  • Standard MMFs support near-term obligations with enhanced yield potential. Ultra-short bond funds target higher returns for strategic cash by accepting slightly lower liquidity and longer duration.

The use of MMFs can be tailored to each investor’s specific requirements. This means a different approach could be used for different cash segments, such as operational, core and strategic cash balances. Investors should also think about their investment horizon and appetite for risk: ongoing uncertainty around short-term interest-rate movements means that moving into longer-dated investment strategies can lead to considerably higher levels of risk, as well as potentially higher returns.