The ECB cuts the interest rate to 2%, the Euro Savings Portfolio to 1.6%

ECB cuts rates to 2%

As expected, the ECB (European Central Bank) has cut interest rates for the eighth time, setting the deposit facility rate at 2%. The official interest rate reached a peak of 4% in 2023. Central banks usually raise the cost of money during periods of inflation to slow the economy and contain rising prices, and then cut rates when inflation is no longer a concern. Recently, inflation in Europe has returned to around 2%, which is the ECB’s long-term target.

Undoubtedly, many uncertainties remain regarding the future, especially concerning the impact of the trade war with the United States. However, at this stage, inflation shows signs of moderating, especially in the services sector, where prices had previously been more difficult to control.

Policy divergence between Europe and the U.S.

The path of official rates in Europe has recently diverged from that of the U.S. Federal Reserve (FED), which has chosen to pause its rate cuts to observe the effects of Trump’s new economic policies. For the ECB, this is likely the last cut before a pause. President Lagarde herself has stated that the cycle of reductions can be considered concluded.

The divergence with the U.S. rate path reflects the different dynamics of both economies. Europe is much more stagnant. In the years following the great crisis of 2008, the U.S. economy proved to be much more dynamic and gained a significant advantage in technological innovation.

However, Germany is now preparing to use its budget to boost the economy, financing a large infrastructure modernization program valued at €500 billion. At the same time, NATO has proposed increasing defense spending to 5% of GDP, allocating 3.5% to defense proper and 1.5% to related sectors. These are essentially fiscal stimuli, and to finance them, it is likely that Europe will loosen its budgetary restrictions.

All these new expenditures could boost the European economy, making further rate cuts less appropriate in the event of a potential recovery. As always, Christine Lagarde has reiterated that each decision will depend on incoming data.

As for our portfolios, the ECB’s decision is reflected in a decrease in the yield (IRR) of the SAVINGS portfolios, which now stands at 1.6%. Nevertheless, they remain one of the best ways to park liquidity. Our portfolios offer very competitive returns compared to market rates, with no maturity restrictions. Moreover, for those seeking higher returns, they can opt for one of our target portfolios. For example, a portfolio maturing in 2028 currently offers a yield to maturity of approximately 2.25% per year.

The (Variable) IRR of our Euro Savings Portfolios drops to 1.60%

Our savings portfolios offer a yield that accumulates at the same pace as official rates minus costs: that is why we call it a variable IRR (Internal Rate of Return). The previous variable IRR was 1.85%.

After the cut, it will fall to 1.60% from 06/09/2025, for the lowest capital level, that is, for portfolios managing between €1,000 and €500,000 (see how we calculate the variable IRR of the Savings Portfolio). The account’s IRR increases up to 1.65% for amounts over €500,000, 1.75% for amounts over €1,000,000, or 1.78% from €5,000,000 (due to the effect of reduced inbestMe management fees calculated in tiers according to the amount managed in the portfolio).

Important note: At the time of writing this article, the 0.25% reduction has not yet been reflected in the money market funds used in our portfolio. This is because some assets in the funds’ portfolios still have yields linked to previous rates. We have always acted prudently in communication related to the calculation of the effective variable IRR. In cases of increases, we have not announced the change until it is effectively reflected. Regarding reductions, we prefer to be cautious and announce the decrease in advance, even if it is not yet fully reflected in the money market funds used, anticipating what will happen in a few days.

Let us remember that this is the variable IRR that can reasonably be expected to be obtained in one year if rates remain at this level. There are no other adverse effects on the portfolio’s value. The only change is that interest will now accumulate at a slightly lower rate. As we have repeatedly published, the IRR of our Savings Portfolio remains one of the most competitive remunerations you can find for your immediate savings or emergency fund.

Systematically, our Euro Savings Portfolio has had superior returns. In this period, it has been 1.4 times higher than deposit interest rates. Since its launch, the Savings Portfolio has accumulated a 7% return compared to 5.1% that the average one-year deposit would have accumulated, a difference of 1.9 percentage points, as shown in the following graph.

With our Savings Portfolio, you do not have to be on the lookout for the best bank offer; you will always be close to the best options, with better taxation and the advantages of transferability (only for the investment funds version), and with the advantage of compounding the interest rate over time without being subject to penalties when you need the money (available in 5 business days).

Target Portfolios: sets a target return of 9.5% (IRR 2.25%)

At inbestMe, the only portfolio focused on immediate savings or the emergency fund is the Savings Portfolio, due to its flexibility and low risk.

With the recent ECB interest rate cuts, the yield curve has stopped being inverted. This means that market interest rates are higher the longer the term.

For savings that you can invest and commit to a predetermined term, at inbestMe we offer Target Portfolios with maturities 12/2026, 12/2027, 11/2028, and 12/2028. With a target portfolio, you can set an accumulated target return of up to 9.5% and annualized target returns of up to 2.25% in EUR*.

To consider them, first make sure you do not need the money until that maturity (although withdrawal is flexible, before maturity you may not obtain the target return). A target portfolio is especially useful for investors who have a defined goal within the next few years.

Suppose you need €100,000 to buy a house in 4 years. In this case, it would be very useful to have reasonable certainty about the return you will get from your portfolio to ensure that these €100,000 will be available when you need them. It would not be advisable to invest all the money in stocks, as a stock portfolio can fluctuate a lot over time. It would be better to have a target portfolio, in which the return can be known in advance. This option would also be more suitable than a traditional bond portfolio, where returns can fluctuate over time. It could even be safer than a savings portfolio, since its IRR is unknown for the future. In the case of the savings portfolio, you would never lose due to a negative capital variation, but you cannot know for sure at what IRR your money will grow in the future.

Bond portfolios (IRR up to 3.9%)

If your investment term is still short or medium term, but more indefinite, we also offer Bond Portfolios, with IRRs reaching up to 3.8% in EUR* for the aggressive bond portfolio.

*Important note: these target returns or IRRs are the latest calculated on 04/01/2025 and are subject to change. On the corresponding pages for each portfolio, you can see more details. Due to the increase in the yield curve in recent months, investors with investment horizons longer than one year may find more profitable alternatives than the Savings Portfolios, whose returns have decreased.

Diversified indexed fund portfolios

To invest prioritizing capital accumulation, our indexed fund portfolios (or ETFs) (10 profiles) combining different proportions of fixed income/equities are the most suitable to benefit from higher returns with very high diversification. The minimum term to consider is 3 years.

Diversified pension plan portfolios

Para complementar la jubilación nuestras carteras de planes de pensiones son las más adecuadas. 

Let us remember that they have limited liquidity (retirement, serious illness, disability, or after 10 years). Now only €1,500 per year can be contributed and deducted from taxable income to individual pension plans.

For both reasons, we may decide to complement our retirement goal with indexed fund portfolios or with company pension plans if we have access to them.