Interest rate market outlook 2025

The year 2024 was favourable for bond investors. The slowdown in inflation, which began at the end of 2022, continued into 2024. At the same time, economic growth also decelerated, creating conditions for the European Central Bank to start cutting key interest rates. This benefited bond investors in particular. All three of UB’s fixed income funds achieved positive returns in 2024, ranging from 3.9% to 7.4%. UB’s fixed income funds only invest in euro-denominated fixed income securities.

Interest Rate Market Outlook Remains Positive in 2025

The year 2025 also looks positive for bond markets, as interest rates are expected to continue their downward trend in the new year. In both the euro area and the United States, inflation slowed to a range of 2–3% in the past year, which created the conditions for central bank rate cuts in 2024. Interest rates are expected to continue decreasing in 2025.

As the year begins, monetary policy outlooks are somewhat diverging between Europe and the United States. Economic growth prospects in the euro area are not strong, and the European Central Bank is expected to continue gradual rate cuts throughout the year until the key interest rate reaches around 1.5–2.0%. In the United States, the economy is in better shape than in Europe. Due to strong economic growth prospects, the Federal Reserve is expected to proceed more slowly with rate cuts than the European Central Bank. The market anticipates that the key interest rate in the U.S. will not fall below 4%.

Due to the better economic growth in the United States, UB’s fixed income funds have already geographically diversified their holdings towards euro-denominated loans issued by U.S. companies. Among sectors, the interest rate cuts particularly benefit the real estate sector, and its weight in the funds has been increased compared to the previous year.

Thanks to the European Central Bank’s upcoming rate cuts, the year 2025 still looks promising from a bond investor's perspective, and the return outlook for fixed income funds remains positive. This supports the role of this asset class as a key diversification component in investment portfolios. The reduced volatility of bond investments following the volatile years has restored their role as stabilizers for portfolio development.

Although the outlook for the interest rate market is currently quite favourable, there are also risks. Unexpected geopolitical events and potential import tariffs imposed by Trump may create uncertainty in the market during 2025.

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The information presented is based on UB’s own estimates and sources considered reliable by UB. The information on which the conclusions are based may change quickly and UB Group may revise its market view without prior notice. No information obtained through this presentation should be construed as a solicitation to invest. When making investment decisions, readers should base their decisions on their own assessment of the investment and the risks involved, and to consider their personal goals and financial situation.

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