High interest rates and CDs: an opportunity that not everyone is seeing

josevas217 (80)in PussFi 🐈 • 22 hours ago

Hello PusFii friends, good day to all. Today I want to talk to you about something that I personally find quite interesting in the current economic context in Colombia, and that is the topic of CDs (Certificates of Deposit). I know that for many it may sound boring, unexciting, because of course, it's not the same as talking about cryptocurrencies that rise 20% in a day or stocks that skyrocket, but when you look at things with a cool head, you realize that there are times when the traditional approach ends up being quite convenient.

_Source

This year, the Central Bank had been discussing the possibility of lowering the interest rate, something that had been gaining traction given the moderation of inflation. However, with the 23% increase in the minimum wage decreed by President Petro, the landscape changed. And this isn't an ideological issue; it's a technical one. A wage increase of that magnitude directly impacts production costs, consumption, and, of course, the Consumer Price Index (CPI).

When inflation rises or inflationary pressure is perceived, the central bank has a primary tool for controlling it: the interest rate. If inflation threatens to rise, the rate remains high or may even increase further. And if inflation falls steadily, then they can reduce the rate. It's a delicate balance. It's not something that changes arbitrarily, but rather in response to very specific economic variables.

_Source

So, what does this have to do with CDs? A great deal. Because the profitability of CDs is closely linked to the benchmark interest rate. If the rate falls, the returns offered by banks on these instruments also decrease. And if the rate remains high or rises, CDs tend to offer better returns to attract savers' money.

Therefore, in the current scenario, where the possibility of rate cuts has stalled and the focus is instead on keeping rates high for longer, CDs remain an attractive option. We're not talking about getting rich, but rather about protecting capital against inflation. And that, in a country like ours, is no small matter.

Personally, I believe that short-term investing, between 3 and 6 months, can be a very prudent strategy. First, because it allows you to take advantage of current rates without committing yourself for too long. And second, because in an environment where central bank decisions can change depending on how inflation evolves, maintaining some flexibility is key.

_Source

As you can see above, an investment of 5 million pesos, the equivalent of $1,362.05 today, is an attractive investment. Calculations were performed using the CDT calculator from Bancolombia, one of Colombia's leading banks.

Furthermore, many people underestimate the power of a "safe" return compared to taking unnecessary risks. Not all money needs to be exposed to volatility. Some of it can and should be invested in conservative instruments, especially if the goal is to preserve value. If interest rates remain attractive and inflation doesn't exceed expectations, CDTs can fulfill that role very well.

Things can change, of course. The economy is dynamic. But for now, given the current context, it seems to me that CDTs remain a very logical alternative for those seeking stability and protection against inflation. This is a personal opinion, based on how I see the current situation. I'd like to know what you think. Take care.