Investment of liquidity during the period of falling interest rates

In view of the stagnating economy and falling inflation, the key interest rate is being gradually lowered. Companies are faced with the challenge of understanding the impact on their decisions regarding the investment of surplus liquidity. A rethink is required: how can funds be used sensibly when yields are falling?

We would like to shed light on how treasurers can react to the changed interest rate environment and which strategies are now required.

The German economic experts predict zero growth for the German economy in 2025.1 The EU Commission also shares this assessment.2 The OECD takes a slightly more positive view, forecasting growth of 0.4 per cent for Germany in 2025. Growth of around one per cent is predicted for the coming year. In relation to the EU as a whole, growth of around 1.1 per cent is expected for 2025, while an increase of just under 1.4 per cent is anticipated for 2026.

At the same time, inflation is declining: in the eurozone, it fell significantly in May and, at 1.9 per cent, is slightly below the European Central Bank's (ECB) target of 2.0 per cent.3

Stagnating economy, falling inflation - reasons for the ECB to cut the key interest rate further. Accordingly, the seventh interest rate cut in a row followed at the beginning of June.4 With the cut of 25 basis points, the key interest rate now stands at 2 per cent. This interest rate level allows the ECB to adjust in both directions, depending on future economic developments - an option that is certainly advantageous in the current economic and geopolitical uncertainty.

Against this backdrop, companies are increasingly faced with the question of how interest rate expectations affect decisions on the investment of surplus liquidity. Companies and treasurers are faced with the challenge of adapting their liquidity investment strategies. While it has been possible to invest liquid funds at attractive interest rates again in recent years, the question of how these funds can be utilised sensibly even when interest rates are falling is now increasingly being raised again.

The challenges of dealing with inflation and its integration into effective interest rate risk management will be discussed in detail in one of our upcoming newsletters.

A moderately falling interest rate environment in the short to medium term is placing new demands on liquidity and investment management in corporate treasury. Companies with significant cash holdings are confronted with declining returns and a growing need to utilise available funds more efficiently. The focus is increasingly shifting from pure capital preservation to the targeted management of liquidity utilisation.

Questions such as "How much liquidity is actually needed?", "Which alternative forms of investment make sense?" or "How can funds be segmented according to need?" are once again gaining relevance. A forward-looking allocation of liquidity is therefore becoming a decisive success factor. Especially when neither a sustained period of low interest rates nor a medium-term rise in interest rates can be ruled out.

• The differentiation of cash holdings is aimed at meeting the various requirements for security, availability and income. A distinction is made between the following categories:
• Operating liquidity: funds for short-term requirements (e.g. wages, supplier invoices)
• Tactical liquidity: Funds that will be needed in one to three months (e.g. for planned investments)
• Strategic liquidity: Surplus funds without a short-term purpose

While operational liquidity must continue to be kept secure and available at short notice, tactical and strategic funds in particular are coming more into focus as interest rates fall.

For tactical liquidity, this means that a purely short-term parking position could lead to a loss of returns if medium to long-term, but still liquid investments - such as conservative money market funds or flexible time deposit models - are not utilised at an early stage.

Strategic liquidity requires an even more active rethink: here it is important to utilise the wide range of investment products on the market. Instead of traditional bank deposits, other forms of investment should be examined. These could be fund products, corporate bonds or other alternatives with a stable income profile. However, it is important to ensure that these investments are in line with risk management requirements and that internal approval processes are taken into account. This also includes the expertise and qualifications of the executing employees. This type of investment therefore often falls within the remit of asset management.

In a falling interest rate environment, it is no longer sufficient to "safely park" liquidity. Instead, the differentiation of funds must be utilised in order to react specifically to the changed risk/return profile.

1. Being too conservative with liquidity can be expensive. The reasons for this are, on the one hand, lost earnings opportunities and, on the other, possible negative interest rates. Active investment management at an early stage can provide a remedy.
2. A diversified portfolio with alternative investment opportunities increases flexibility and the chance of generating stable interest income.
3. Clear investment governance in cooperation with risk management ensures that emerging risks are dealt with appropriately.
4. The support and automation of liquidity management and forecasting by treasury management systems helps to manage liquidity more efficiently. The use of AI in this area is also being driven forward. We have already highlighted opportunities for the use of AI in this and other areas of treasury responsibility in previously published newsletter articles and will continue to do so regularly in the future.

This list of possible lessons learnt is not intended to be exhaustive. These differ depending on the company or sector. In principle, treasurers should analyse the past phase of low interest rates in order to be able to react appropriately to future developments.

The low interest rate environment therefore requires good preparation and relevant analysis of liquidity. With the help of lessons learnt from the past, the differentiated investment of segmented surplus liquidity continues to offer the opportunity to generate interest rate stability and income. An overly conservative approach to liquidity harbours just as many risks as an overly aggressive one.

Source: KPMG Corporate Treasury News, Issue 156, July 2025Authors:

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 vgl. Tagesschau (21.05.2025) Wirtschaftsweise gehen in Frühjahrsgutachten von Stagnation aus | tagesschau.de 

2 vgl. Tagesschau (19.05.2025) EU-Kommission senkt Wachstumsprognose deutlich | tagesschau.de

3 vgl. Tagesschau (03.06.2025) Inflation im Euroraum überraschend stark gefallen | tagesschau.de

4 vgl. IfW Kiel (05.06.2025) EZB-Zinssenkung gut begründbar | Kiel Institut