Whether I am paying for the latest family food shop, maintaining my house or refuelling my car, I am constantly reminded that persistent inflation isn’t just a central bank talking point, it is a lived reality.
At its meeting at the end of July, the Bank of England left Bank Rate unchanged at 3.75%, extending the current pause in the rate-cutting cycle. Although the decision was widely expected, the 6-3 vote revealed a growing divergence of opinion among policymakers, with three members favouring an increase in rates. This reflects continued concerns that higher energy prices and wider geopolitical uncertainty could keep inflation above target for longer than anticipated.
Many investors, whether individuals or businesses, continue to hold significant balances in traditional bank accounts that pay little to no interest. Whilst cash provides comfort and security, inflation can quietly erode its purchasing power over time. This creates a dilemma: hold cash and accept a gradual decline in its real value or invest in a volatile equity market that offers greater return potential but also comes with a greater downside risk.
Since the Covid-19 pandemic and subsequent interest rate rises, cash is no longer the dead asset it was often perceived to be. Even after the recent rate-cutting cycle, yields remain elevated by historical standards, and short-term liquidity has become a powerful investment tool. Investors can currently generate attractive returns from many cash products and, in some cases, outpace inflation while retaining the flexibility to seize market opportunities.
Retail investors can achieve this through a combination of call accounts and fixed deposits. Call accounts offer interest rates that are higher than a traditional bank account, while still providing instant access. Fixed deposits allow investors to lock away sums of money for a fixed period in exchange for a higher rate of interest. Combining both approaches, investors can maintain a readily accessible pool of funds for upcoming obligations or market opportunities whilst also enhancing the overall yield generated across their cash holdings.
Institutional investors have an even broader toolkit available to them using products such as overnight deposits and certificates of deposit. Overnight deposits, as the name suggests are placed for a single day and rolled daily. One of the key features of this product is compound interest as both principal and accrued interest are invested daily. This is an attractive option for institutions looking for an attractive solution for operational cash balances where liquidity is paramount.
Certificates of deposit (“CDs”) provide another investment option in a cash portfolio. Like fixed deposits, they offer a predetermined rate of interest over a specific term. However, unlike a fixed deposit, a CD is a tradable security and can be sold in the secondary market prior to maturity, thus offering a further layer of liquidity to the portfolio.
An institutional investor can allocate a portion of their portfolio to high interest, instant access options such as call accounts and overnight deposits to meet operational requirements and have a diversified allocation of CDs issued by high quality, highly rated banking institutions to further enhance diversification and overall returns.
A key lesson is that cash should no longer be viewed solely as a safety net or as capital waiting to be invested elsewhere. Higher interest rates mean cash is once again capable of generating meaningful returns. In today’s market, cash management is not about sitting on the sidelines, it is about ensuring that your liquidity is working as hard as it can, preserving capital and keeping investors positioned for whatever comes next.
