Investing Liquidity in a Declining Interest Rate Environment

As economic growth stalls and inflation eases, central banks are gradually reducing key interest rates. For businesses, this shift raises important questions about how to manage and invest excess liquidity. A change in mindset is required: How can companies put their cash to good use when yields are falling? 

In this article, we explore how corporate treasurers can respond to the new interest rate environment and which strategies are worth considering now.

The German Council of Economic Experts expects the country’s economy to be flat in 2025.¹ The European Commission shares that outlook.² The OECD is slightly more optimistic, forecasting 0.4% growth for Germany next year. For 2026, a modest recovery is expected, with growth of just above 1% for Germany and 1.1% for the EU as a whole, gradually strengthening to around 1.4% in 2026. 

Meanwhile, inflation is retreating. In May, it fell noticeably across the eurozone, now sitting at 1.9%. That’s just below the European Central Bank’s (ECB) target of 2%.³

Sluggish growth and declining inflation give the ECB reason to push interest rates further down. In early June, it implemented its seventh consecutive rate cut⁴, bringing the deposit rate down by 25 basis points to 2%. This gives the ECB more room to adjust rates in either direction depending on how the economy – and global developments – evolve. That flexibility is particularly valuable given the ongoing uncertainties. 

Companies are increasingly asking how these rate movements should inform decisions around excess cash. Treasurers now face the task of adjusting their liquidity investment strategies. While recent years allowed for attractive returns on cash, the question has returned: how can those funds be deployed wisely when rates are falling?

We’ll explore in greater detail the role of inflation management and effective interest rate risk strategies in one of our upcoming newsletters.      

Falling rates over the short to medium term are putting new demands on corporate treasury. For businesses with large cash reserves, declining yields mean a greater need to use available resources more efficiently. The emphasis is shifting from preserving capital to actively steering liquidity in line with corporate goals.

That also brings renewed focus to questions like: How much liquidity is really needed? What other investment options make sense? How can funds be segmented to reflect actual needs? Proactive, tailored allocation of liquidity becomes a critical success factor – especially when neither a prolonged low-rate environment nor a medium-term rebound in interest rates can be ruled out. 

Segmentation allows companies to meet different priorities for capital – balancing safety, availability and return. Broadly speaking, there are three categories:

• Operating liquidity: cash required for day-to-day needs such as payroll and supplier payments.
• Tactical liquidity: funds needed in one to three months, typically for pre-planned spending such as capex.
• Strategic liquidity: excess cash without short-term commitments.

While operational liquidity must remain readily accessible and safe, falling rates draw new attention to tactical and strategic funds. 

For tactical liquidity, this means: Simply parking these funds in short-term instruments could result in lost returns. To avoid this, companies should consider moving early into slightly longer-dated but still flexible investments, such as low-risk money market funds or solutions with customizable maturities.

Strategic liquidity calls for a more proactive approach: Companies should make full use of the broad range of investment options available. Rather than relying only on traditional bank deposits, they may want to explore other forms of investment – such as selected fund products, corporate bonds or other instruments that offer stable return profiles. This kind of allocation requires alignment with internal risk policies and approval processes. It’s also essential that staff involved in execution have the appropriate expertise. In many organizations, investing strategic liquidity falls under the domain of asset management. 

In a falling rate environment, simply “parking cash safely” is no longer enough. Treasurers need to use segmentation strategically — responding to the altered balance between risk and return.

The low and negative rate period that lasted through 2022 offers valuable insights.

1. One of the clear takeaways: an overly cautious approach to liquidity can be costly. By steering clear of alternative investments, companies may miss out on returns. In some cases, they may even be hit with negative rates. Active portfolio management that is initiated early can help mitigate this.
2. Diversified investment structures increase flexibility and the ability to earn stable interest.
3. Collaborating closely with risk functions supports sound governance across all decisions. 
4. Technology also plays a growing role in managing liquidity and making forecasts. Automated treasury systems can significantly boost efficiency – and AI-based solutions are gaining traction in this area too. In previous newsletters, we’ve highlighted how AI can support decision-making across treasury operations, and we’ll continue examining these developments going forward.

This list of takeaways is not exhaustive – optimal strategies will differ depending on the company and industry. But it’s clear that looking back on the last low-rate phase can help treasurers prepare for whatever comes next.

The current rate environment, with the potential for a prolonged period of lower interest rates, calls for careful preparation and insightful analysis of liquidity strategies. Drawing from past experience, a well-structured approach to excess liquidity can still create value. Sectoring cash thoughtfully and investing it accordingly continues to offer opportunities for interest returns and balance sheet stability. There are risks at both extremes. A strategy that’s too cautious could leave value on the table, but being overly aggressive comes with its own set of challenges. Finding the right balance will be key.

Source: KPMG Corporate Treasury News, Edition 156, July 2025
Authors:
Nils Bothe, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Tobias Riehle, Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG

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¹ see Tagesschau (21.05.2025) Wirtschaftsweise gehen in Frühjahrsgutachten von Stagnation aus | tagesschau.de [The Five Sages of Economy predict stagnation in spring report]
² see Tagesschau (19.05.2025) EU-Kommission senkt Wachstumsprognose deutlich | tagesschau.de [EU Commission significantly lowers growth forecast]
³ see Tagesschau (03.06.2025) Inflation im Euroraum überraschend stark gefallen | tagesschau.de [Inflation in the eurozone drops surprisingly sharply]
⁴ see IfW Kiel (05.06.2025) EZB-Zinssenkung gut begründbar | Kiel Institut [ECB interest rate cut well justified]