Please note: AI generated transcript.
Text on screen: Three scenarios for corporate cash, Jill Hirzel, Senior Investment Specialist.
The European Central Bank has raised its deposit facility rate by 25 basis points to 2.5%, broadly in line with expectations ahead of its September meeting.
We've come a long way from the negative rate environment that treasury teams became accustomed to during the last decade. For many years, cash was largely treated as an operational asset. Today, we think it can also make a meaningful contribution to portfolio income.
That gives treasury teams more reason to look closely at where the cash is held and whether each balance is invested appropriately.
The September increase is only part of the picture. Markets are already trying to assess where rates might go next, and those expectations will continue to evolve as new inflation, growth, and labor market data emerge. For treasury teams, we think there are three broad scenarios worth thinking about.
If inflation proves more persistent than expected, the ECB may need to raise rates again. Short-term cash would continue to benefit as yields move higher.
At the same time, leaving surplus balances in low-yielding accounts would become more costly. The distinction between cash needed for immediate operational purposes and cash available for investment becomes much more important when rates are elevated. For organizations holding significant balances, even a modest difference in yields can have a noticeable effect on income.
That doesn't mean taking unnecessary risk or giving up access to cash. It simply means asking whether surplus balances are still being held in the right place. Daily liquidity, diversification, counterparty exposure, and capital preservation would remain central.
Within those limits, higher rates make it more worthwhile to ensure cash is working effectively. The second possibility is that September proves to be the final increase and rates remain close to 2.5% for an extended period.
A period of stability could give treasury teams the chance to step back and look closely at how their cash is structured.
Some balances will always need to be available for payments, payroll, and working capital. Other cash may provide a reserve against unexpected requirements.
There may also be balances that are unlikely to be needed for several months or longer. The third scenario is characterized by weakening economic growth, easing inflation, and an accommodative ECB during 2027.
In this scenario, treasury teams may continue to benefit from today's rates for a time, but as deposits and investments mature, those yields will become harder to replace. That makes investment risk more relevant, particularly for organizations holding substantial balances in overnight or very short-dated instruments.
Where future cash requirements are reasonably predictable, some organizations may decide it's worth investing a portion of their reserve or strategic cash for longer before rates begin to fall. However, any additional income available from extending maturity still needs to be balanced against liquidity requirements, counterparty limits, and the organization's investment guidelines.
The income generated from cash can look very different depending on which of these scenarios play out. If rates move higher, income increases. If rates remain stable, cash continues to provide an attractive level of income. If rates fall, that income gradually declines as deposits and other short-term investments mature. The more confidence an organization has over when cash will be needed, the easier it becomes to decide what should remain available overnight and what could potentially be invested for longer.
Not every euro needs to provide the same level of access, and not every balance needs to be invested over the same time horizon.
One way to approach this is to separate cash balances according to the role they perform. Operational cash supports payments, payroll, and working capital requirements. Because it may be needed at short notice, the priority is usually immediate access and capital preservation.
Reserve cash provides liquidity for unexpected or contingent needs. It still needs to remain readily available, but greater certainty around potential requirements may allow some of it to be invested over a slightly longer period of time.
Strategic cash covers balances with a longer and more predictable investment horizon. Where an organization is confident that this cash will not be required immediately, there may be more scope to extend maturity and reduce the need to invest everything at prevailing short-term rates.
Thinking about these pools can help treasury teams prepare for a range of outcomes while maintaining the liquidity and resilience that the organization needs.
Whatever path the rates take from here, having a clear cash segmentation framework can help organizations make more confident investment decisions.
