Peru Sees Decline in Fixed-term Deposits as Interest Rates stabilize
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Lima, Peru – A notable shift is occurring in Peru’s financial landscape as fixed-term deposit accounts experienced a 1.9% year-over-year decrease in June, according to data released by the Central Reserve Bank of Peru (BCRP). This marks a reversal from nearly three years of continuous expansion fueled by elevated interest rates offered to savers.
The Rise and Fall of Fixed-Term Deposits
the growth in fixed-term deposits began in April 2022, initially with a modest 0.5% annual increase. This momentum accelerated, peaking at a substantial 46.9% increase in May 2023, as banks competed for deposits by offering attractive yields. This period of double-digit growth continued for an extended duration.
In August 2021, the BCRP initiated a series of interest rate hikes to combat rising inflation, triggered by economic disruptions from the global health crisis and subsequently, the war in Ukraine. Thes increases, climbing from 0.25% in April 2020 to 7.75% by August 2023, directly impacted both savings and lending rates, as explained by Víctor Blas, Financial Strategy and Finance Division Manager.
Adjusting Returns and Shifting Strategies
as the BCRP began lowering it’s benchmark rate in September 2023,financial institutions followed suit,adjusting the returns on fixed-term deposits. While some rates remain competitive, they now face increased competition from alternative savings products offering greater liquidity. Banks and financial institutions had previously offered yields as high as 9% annually, a notable increase from the just over 1% offered before the rate hikes.
Did You Know? The BCRP’s monetary policy decisions directly influence the financial habits of Peruvian citizens, impacting where they choose to save and invest their money.
| Year | BCRP Referential Interest Rate | Fixed-Term Deposit Growth (Year-over-Year) |
|---|---|---|
| 2020 (april) | 0.25% | N/A |
| 2021 (August) | Rate hikes Begin | N/A |
| 2022 (april) | Increasing | 0.5% |
| 2023 (May) | 7.75% | 46.9% |
| 2023 (June) | 7.75% | -1.9% |
Where is the Money Going?
Scotiabank analysts attribute the decline in fixed-term deposits to both high existing balances - a result of previous growth - and a reluctance among depositors to renew their accounts. Arturo García, a professor at ESAN University, points to the limited access to funds from the CTS account (a worker’s compensation fund) and delays in approving further withdrawals from private pension funds (AFP) as contributing factors. This lack of readily available funds prompted some clients to forgo renewing their term deposits in favor of immediate liquidity.
“They may have used this money to cover current spending or pay debts that had contracted last year,” García stated.
Moreover, increased volatility in financial markets has created new investment opportunities with potentially higher returns, leading some depositors to shift their funds from fixed-term deposits to products like mutual funds. Blas noted that those leaving fixed-term deposits aren’t necessarily spending the funds, but rather transferring them to accounts offering greater accessibility.
Pro Tip: Consider diversifying your savings portfolio to mitigate risk and maximize potential returns, exploring options beyond traditional fixed-term deposits.
Other savings accounts that offer unrestricted access to funds currently provide returns exceeding 4% per year.
Related: Cooperatives intervened by SBS have no protection for savers, how many are like that?
Looking ahead
The evolving financial landscape in Peru presents both challenges and opportunities for savers.Understanding the factors influencing deposit rates and exploring alternative investment options is crucial for making informed financial decisions. What strategies will Peruvian banks employ to attract and retain depositors in this changing environment? And how will individuals adapt their savings habits to navigate these new conditions?
The trend of fluctuating interest rates and shifting savings behaviors is a global phenomenon, influenced by macroeconomic factors such as inflation, geopolitical events, and central bank policies. Peru’s experience reflects a broader pattern of consumers seeking optimal returns while balancing liquidity and risk. The long-term implications of these shifts will depend on the stability of the Peruvian economy and the effectiveness of government policies aimed at promoting financial inclusion and responsible savings habits.
Frequently Asked Questions about Fixed-Term Deposits in Peru
- What are fixed-term deposits? Fixed-term deposits are savings accounts that hold a fixed amount of money for a fixed period of time, and in general, offer a higher interest rate than regular savings accounts.
- Why are fixed-term deposits declining in Peru? Declining rates are due to the BCRP lowering its benchmark interest rate, making other savings options more attractive.
- What are alternative savings options in Peru? Alternatives include mutual funds, free-availability savings accounts, and potentially reinvestment in the stock market.
- What is the CTS account? The CTS (Compensación por Tiempo de Servicios) is a worker’s compensation fund in Peru, providing a financial cushion in case of job loss.
- What is the AFP? AFP (Administradora de Fondos de Pensiones) are private pension funds in Peru, and withdrawals from these funds have been a topic of recent debate.
We hope this article has provided valuable insight into the current state of fixed-term deposits in Peru. We encourage you to share this information with your network and join the conversation in the comments below. Don’t forget to subscribe to our newsletter for the latest financial news and analysis!
