In brief

  • Our base case sees the Federal Reserve (Fed) cutting rates by 50 basis points (bps) in 2025.
  • We see the European Central Bank (ECB) cutting rates at each of the first four meetings this year, taking the deposit rate down to 2% by the middle of the year but then pausing. 
  • In the UK, we expect the Bank of England (BOE) to cut rates four times in 2025.
  • While declining from recent peaks, yields on money market strategies are likely to remain attractive compared with most of the last 15 years.
  • Standard money market strategies could continue to outperform short term money market strategies in 2025.
  • For cash with longer investment horizons, segmenting between money market strategies and ultra-short duration strategies could make sense.

US

Business surveys currently point to an economy that remains robust, driven by strong service sector growth. Long-term fixed rate mortgages have made the economy less sensitive to higher interest rates. With the economy holding up, further progress on taming inflation could prove elusive, with tariffs and fiscal policy posing potential risks to a continued moderation in price pressures. With this in mind, we expect the Fed will only cut rates twice this year.

Nevertheless, the market is aware of these points and is only pricing around 50bps of rate cuts for 2025. With that in mind, we think it makes sense to maintain relatively elevated weighted average maturities on our short-term USD money market strategies. Strategies that can extend their duration beyond that of a short-term money market strategy, such as standard money market strategies and ultra-short duration strategies, could continue to outperform as long as rates aren’t cut by less than is currently priced in.

Europe

The growth outlook in Europe is meaningfully weaker than in the US. The manufacturing sector remains in contraction and the potential for tariffs, emanating from the US, raises the risk of a further hit to a sector that is already struggling.

We expect the ECB to be more focused on supporting growth this year given the moderation in inflation pressures. We therefore expect the ECB to cut rates at each of its meetings in the first half of the year, bringing the deposit rate down to 2%, a level closer to neutral judging by recent ECB commentary.

The yield curve is more inverted in Europe than in the US and the market is currently pricing in slightly more than the four rate cuts we expect this year. With that in mind we currently have a lower duration in our EUR standard and ultra-short duration strategies than in the equivalent USD strategies.

UK

The UK growth outlook is somewhat lacklustre, with risks skewed to the downside as surveys suggest that the hiring outlook has deteriorated following the recent budget. Wage growth remains elevated, but should start to moderate according to recent surveys. Given the short-term nature of the UK mortgage market compared with the US and Europe, despite falling interest rates, some homeowners are still set to see their mortgage rates increase substantially this year when they have to refinance loans taken out at much lower levels.

With all this in mind, we expect the BOE to cut rates four times this year. With the market currently pricing less than three cuts, we see value in extending duration in our standard and ultra-short duration strategies. Despite expecting more rate cuts than the market is pricing we still think money market yields will remain attractive compared with those seen for most of the last 15 years. 

Conclusion

Interest rates are likely to continue to decline in 2025 but are likely to remain relatively elevated, meaning returns on money market strategies are likely to remain attractive. With this in mind, we don’t expect the kind of outflows from money market strategies that were seen in the past when central banks responded to deep recessions by cutting rates close to or below zero. Even in a recession we don’t think rates would fall that low again.

With the market already pricing in a slow pace of cuts in the US and UK we think that there is value in extending duration within cash strategies. Standard and ultra-short duration strategies could outperform short-term money market strategies in 2025, with the potential for even more significant outperformance if rates were to fall by more than we anticipate in our base case.

In Europe, an active approach to managing duration within cash strategies is likely to be particularly important this year given the number of cuts that are already priced in, and the potential for market volatility driven by uncertainty related to potential tariffs and their effect on the economic and interest rate outlook.