Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, September 2025
Policy
The European Central Bank (ECB) Governing Council (GC) maintained the deposit rate at 2.00%, in line with expectations, at its meeting on 11 September.
Data
- Headline inflation for September increased marginally to 2.2% from 2.0% in August, just below consensus expectations of 2.3%. The increase was driven by base effects in energy inflation. Core inflation was stable at 2.3%, while services inflation rose slightly from 3.1% to 3.2%.
- Eurozone GDP growth was confirmed at 0.1% for Q2 2025.
- The eurozone composite purchasing managers’ index (PMI) for September increased marginally to 51.2 —readings above 50 are indicative of growing activity. The improvement was due to an increase in the services business activity component.
- The eurozone unemployment rate for August ticked slightly higher from 6.2% in July to 6.3%.
Outlook
The monetary policy decision statement from the ECB was largely unchanged from that issued in July, but it did omit references to easing wage pressures and economic resilience. The ECB reiterated that decisions would be made on a meeting-by-meeting basis guided by the inflation outlook and the risks surrounding it. ECB President Christine Lagarde described policy as being “in a good place” and noted that inflation “is where we want it to be”.
The ECB amended its GDP and inflation forecasts. The GDP growth forecast for 2025 has been revised up from 0.9% to 1.2%, reflecting the better-than-expected start to the year. However, the ECB still expects growth to be subdued in the second half of 2025. The 2026 growth projection was revised down slightly from 1.1% to 1.0%, and the 2027 forecast was unchanged at 1.3%. The new inflation projections are also little changed, showing the core rate averaging 1.9% in 2026 and 1.8% in 2027 (previously 1.9% in both years), while headline inflation averages 1.7% next year and 1.9% in 2027 (previously 1.6% and 2.0%). These would appear to reflect minor adjustments rather than a fundamental change to the economic outlook. President Lagarde said that risks to the outlook were “more balanced” now than in June because the EU has not retaliated to US tariffs and trade uncertainty has declined.
Economic data suggests that growth in the eurozone continues to be positive, albeit subdued. This was reflected in the September PMIs, although the recovery in the manufacturing sector seen earlier in the year now appears to have stalled. This was also in line with the European Commission's economic sentiment indicator, which edged slightly higher in September amid an improvement in consumer confidence, although sentiment in manufacturing and services slipped back. While labour market data shows that the eurozone unemployment rate remains close to its historical low, EC surveys suggest there has been a softening in employment conditions; the employment expectations index has moved lower.
The eurozone headline inflation rate edged up due to energy base effects, and core inflation was stable, in line with the ECB's September projections. ECB President Lagarde has restated that inflation risks remain two-sided, but that the range around the central forecast has narrowed. Following the trade agreement with the US, tariff-related risks have diminished. ECB Chief Economist Philip Lane noted that the eurozone is unlikely to return to the very low inflation environment that existed before the pandemic, while also stating there was a limited risk of inflation remaining significantly above target. There is a perception that downside risks have faded and that the ECB has sufficient flexibility should the balance of risks shift or a new shock emerge. At the end of September, the market implied rate for October stood at 1.95%. The implied rates for December 2025 and March 2026 were 1.90% and 1.86% respectively, reflecting reduced expectations for a further ECB rate cut.
Fund
Following the ECB decision to maintain the deposit rate, markets continue to reflect a view that the ECB is nearing the end of the rate-cutting cycle. Indeed, there is speculation that the next move could be a hike by the end of 2026. The fund targeted a neutral weighted average maturity (WAM) of around 35 days although this was volatile as assets under management (AUM) fluctuated through the period. A small percentage of investments were added along the curve to take advantage of long-term higher yields in prime credit. However, most investments remained short in duration, targeting the higher yielding sovereign, supranational, and agency issuance available. Fund liquidity requirements, both overnight and weekly, remained well in excess of minimum requirements at all times. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo, and bank deposits. The fund credit rating exceeded requirements at all times.