Navigating uncertainty: active money market fund management in a changing rate environment

The direction of interest rates appeared straightforward, until recently. Inflation was easing, economic growth was subdued, and central banks were expected to begin lowering rates.

Since the renewed US-Iran conflict, however, the economic outlook has become less certain. That uncertainty has created one of the most challenging environments for sterling money market fund managers in recent years.

Most market participants believe inflation risks remain high and are currently pricing in a Bank of England (BoE) rate increase by November 2026. Others believe current policy rates are already restrictive, and the next move will ultimately be lower.

For investors in money market funds, however, these divergent views are difficult to navigate. Managing liquidity is no longer just about capturing the prevailing overnight rate. It is increasingly about understanding risk, preserving flexibility, and positioning portfolios for a range of possible outcomes.

Understanding today’s economic backdrop

Before the start of the US-Iran conflict, the consensus view was that interest rates were likely to fall. Inflation had been moderating, and higher borrowing costs were increasingly viewed as a constraint on economic activity. In that environment, many investors expected central banks to begin gradually easing monetary policy.

The sudden conflict changed that outlook. Higher energy prices gave the global economy an inflationary shock. Central banks have limited ability to influence energy prices directly, but they focus on the potential for so-called ‘second-round effects’, particularly the risk that higher living costs translate into stronger wage demands and, ultimately, higher services inflation.

Changing paths for interest rates since the start of the year

Source: CCLA/Bloomberg. Data as at 15/07/2026. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise.

Central banks’ responses have varied across regions. In Europe, inflation concerns have prompted a hawkish stance from policymakers, albeit from a base of lower interest rates. In the UK, the picture is more nuanced. Weak economic growth and a subdued labour market have encouraged the BoE to maintain its wait-and-see approach.

Nevertheless, the debate is far from settled: two members of the BoE’s nine-person Monetary Policy Committee (MPC) have recently voted in favour of raising rates, illustrating the competing forces at work within the UK economy.

Our view: interest rates higher for longer, but not rising from here

Financial markets are pricing in the possibility of further interest rate hikes, but we expect the BoE to keep rates unchanged for the remainder of this year.

The BoE is closely monitoring inflation risks from higher energy costs, but we believe the hurdle for a majority of the MPC to vote for a rate increase is high. Growth remains weak, the labour market continues to soften, and current interest rates are already restrictive.

Consequently, we continue to believe that the next move in UK interest rates is more likely to be down than up, albeit probably not until 2027.

Of course, forecasting interest rates with certainty is impossible. The role of an active manager is not to predict the future but to construct a portfolio that can perform effectively across a range of outcomes.

Positioning for near-term opportunities

Because we expect interest rates to remain stable for the rest of this year, we are comfortable taking advantage of the attractive yields available on investments maturing before year-end. This approach aims to enable the fund to capture the higher interest rates on bonds due by the end of this year, while maintaining the liquidity and credit quality that investors expect from a money market fund.

In our view, the risk-reward balance is currently favourable for these short-dated investments because the underlying economic outlook over the next few months is relatively clearer than it is further into the future.

Looking beyond year-end

Beyond 2026, uncertainty increases considerably. Several significant events could upset the economic landscape.

In the US, mid-term elections could influence policy priorities and the administration’s ability to implement its agenda.

In the UK, investors will evaluate the implications of the first budget under new prime minister Andy Burnham. His government’s borrowing requirements and the resulting effects on debt markets will be a particular focus of attention.

Geopolitical risks also remain high. Continued cycles of escalation and de-escalation in the Persian Gulf could trigger renewed increases in energy prices. Equally, a successful peace initiative, combined with increased oil production from countries such as Venezuela and the UAE, could place downward pressure on fuel costs.

Each of these outcomes could influence inflation expectations and, by extension, central banks’ interest rate policies.

A two-pronged approach to long-term investments

Money market funds invest in securities with maturities of up to 397 days. As a result, active managers must make decisions today that reflect risks and opportunities many months into the future.

Given the uncertainty, our approach at CCLA has two key elements.

• First, we make selective longer-dated investments, but only in small positions. This helps the portfolio to lock in attractive yields, should interest rates fall, while maintaining flexibility.
• Second, we make use of Floating Rate Certificates of Deposit (FRCDs), which have become an increasingly valuable component of modern money market funds. Unlike traditional fixed-rate certificates of deposit, FRCDs periodically reset their interest payments in line with prevailing market rates. This feature helps protect investors from interest rate volatility and can reduce price sensitivity when market expectations change.

Why active management matters

Periods of uncertainty create challenges, but they also create opportunities.

In the current environment, inflation, geopolitics and central bank policy are pulling markets in different directions. Active management then becomes particularly relevant and valuable to money market fund management. Portfolio construction is no longer simply about seeking the highest available yield. It involves preserving capital and balancing liquidity and return against a wide range of possible economic outcomes.

By selectively securing attractive short-term yields, maintaining a disciplined allocation to longer-dated opportunities, and using instruments such as FRCDs, active managers can position portfolios to navigate market uncertainty effectively and with greater confidence.

For investors seeking a resilient and adaptable liquidity strategy, that flexibility has rarely been more important.

You can find out more about CCLA’s money market funds by visiting: Cash and bonds | CCLA