CD investors face a challenging landscape as interest rates decline, potentially leading to lower returns upon renewal. With many recent CD maturities coinciding with year-end bonuses,savers are now weighing their options in a market where the Central Reserve Bank has already cut it’s benchmark rate three times this year. Experts warn that automatic renewals can result in considerably diminished yields, and proactive negotiation with financial institutions is crucial as competition for deposits intensifies.
Investors holding certificates of deposit (CDs) face a growing risk of reinvesting at lower interest rates as rates decline, according to Mario Guerrero, investment strategist at Scotiabank Wealth Management.
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“As interest rates are falling, when you agree to a CD, it will be difficult to obtain the same rate when it matures; you will likely face a lower interest rate,” Guerrero explained. The trend is prompting some investors to consider alternative fixed-income options.
“You can renew the CD, but each time at lower returns. However, in fixed-income mutual funds, when interest rates fall, bond prices rise,” he noted.
The situation is particularly pressing now, as many individuals recently received additional funds from a year-end bonus and allocated a portion of those funds to 360-day CDs that are now nearing maturity. This timing creates a challenge for those seeking to maintain their returns.
Rate Variation
Currently, the average interest rate on a one-year bank deposit is 3.87%, compared to 3.74% a year ago and 4.97% in 2023, according to data from the Superintendency of Banking, Insurance and AFP (SBS). The variation is even more pronounced at municipal savings banks, where rates have shifted from 7.67% to 4.42% and now stand at 4.62% over the same period.
Ronald Casana, a representative of the Lima College of Economists, emphasized that many CD holders are unaware of their maturity dates. This lack of awareness can lead to automatic renewal at significantly lower rates.
“For example, if a CD is due to mature tomorrow, December 17, and the account holder doesn’t negotiate, the financial institution will automatically renew it under the new conditions. This means the interest rate will revert to the lowest available rate,” Casana warned.
The average interest rate on a one-year bank deposit currently stands at 3.87%. | Photo: Andina
He recommended that savers always contact their financial institution before their CD matures. While banks will have a limit to how much they’ll negotiate, even securing a 3.5% rate after negotiation is preferable to the standard savings rate of around 1% annually.
Casana also noted that financial institutions generally do not proactively inform customers about upcoming CD maturities. “It’s beneficial for the financial institution to have savings at almost no interest,” he stated.
Looking ahead to 2025, the Central Reserve Bank has already cut its benchmark interest rate three times, each time by 25 basis points, from a rate of 5% in November of last year. This series of cuts is influencing deposit rates across the market.
Shifting Preferences
Guerrero observed that investors are increasingly shifting away from CDs and towards alternative investments like mutual funds. This trend reflects a search for better returns in a declining interest rate environment.
However, some financial institutions report that approximately 70% of individuals withdrawing funds from CDs are transferring them to checking or savings accounts. The move underscores a preference for liquidity among some depositors.
Banks and financial institutions typically negotiate with customers at maturity, potentially offering a small premium to incentivize renewal, depending on the size of the deposit. If a customer declines, they are often offered alternative savings or investment products. Banks, for example, manage mutual funds.
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Ramiro Arana, business manager at Caja Huancayo, stated that the institution is transparent with its customers regarding its rate schedules. “We tell them that if they leave, other financial institutions have also lowered their rates. So the effect would be neutral,” he said.
Arana added that customers generally do not leave Caja Huancayo, but often transfer funds from CDs to savings accounts.
Interest rates on time deposits since 2021.
Competitive Landscape
Analysts and financial sector executives anticipate that interest rates will continue to decline next year. However, competition among financial institutions to attract liquidity from recent pension fund withdrawals and profit-sharing payments may mitigate this trend in the short term. This influx of funds is creating a more competitive environment for deposits.
