In the first place, the interest rate is translated as an amount of money, for which you pay to use it, in other words, it is what the central bank of a given country charges banks for lending them money, that they they lend to their customers.
When talking about a deposit, the interest rate is the payment received by a person or company for making the money available to it, and if it is a credit, the interest rate is the amount that this person must pay to who loaned you for using that money.
The 2 things that mainly affect interest rates are:
- Inflation: It means the increase in the prices of goods and services in a country for a sustained time. When this increases, with each unit of currency fewer goods and services can be purchased, that is, it reflects the decrease in the purchasing power of the currency. The exchange rate: It is a reference that is used to know the number of units of a national currency that must be paid in order to obtain a foreign currency or similar, when selling a foreign currency you get a number of national currencies.
Investment as affected by inflation
One way for central banks to curb rising inflation is by raising interest rates. Giving an example, since December 2015, Banxico has raised interest rates on several occasions, which causes an increase in bank yields and rates on loans, credit cards, etc… What causes people to start to reduce your spending and start saving your money, this by reducing inflation, but at the same time slowing down the economy.
Now I will give an example of what inflation can cause in the way we invest, let's imagine that we want to invest 2 million pesos at a nominal rate of 7%, after a year that has passed we will have $ 140,000 pesos, all of this for interest, we would have $ 2,140,000, it would be fantastic But, year after year we know that inflation is growing and financial institutions make calculations so that in future years they will anticipate this. Let's suppose that at the end of 2018 inflation is 8%, it means that people lost purchasing value of 8%, which means that if yesterday with $ 10 pesos you could buy 1 kilo of tortillas, today you can only with $ 5 pesos, or be, half.
So if you invested 2 million last year and this year inflation went up 8%, sadly they lost 1% of the rate they had offered.
The truth is that current inflation is not at all favorable if you want to obtain high income through banking products, with the exception of those banking institutions that control inflation.
The risk in the exchange rate
Sometimes the value of a currency could be favorable or the opposite, because it depends on the currency of the country in which we have made the investment. It is known that it depends a lot on a currency being favorable, either for its economic and social stability, monetary policies, among other things. Sometimes, as in countries that suffer from violent social movements, such is the case of Venezuela, they suffer abrupt changes in their finances so investing is not a good option, but the higher risk it can generate higher profits, and these Such unstable countries try to attract foreign investment to their country by offering high returns that sometimes they fail to give it, this is the risk that you have when investing.
Another clear example that a person can suffer when investing would be, a company or person who wants to buy raw materials in a foreign country with a different currency, runs the risk that the change from its national currency to the foreign one may have a depreciation or in a satisfactory case that is appreciated, but therein lies the risk, because if it was bought but a depreciation of the currency was obtained, at the time of manufacture the cost of production may suffer an increase and this affect its final price.
Investments at the country level
Now, as we see, the interest rate influences the credits they give us, the exchange rate or the inflation that a country may incur, so this rate is also influenced by the central bank because it pays the investors so that they can invest in the different government debt instruments, such as CETES, BONOS, UDIBONOS. So, when we buy this type of instrument, there is no need to wait at the end of a certain time to get our money back, which is the case with banks, we can sell it ahead of time but depending on the interest rates that are in that moment, We can win or lose on our investment, since at the beginning it is possible to have bought it at a higher price and later at a lower price if interest rates have not improved.Everything is a question of risk.
Interest rates now with the issues of elections, the new steel tariffs and all the problems that Mexico has been having with NAFTA, it is possible that interest rates will go up more to try to get people to save and achieve stability.
Investment alternatives
Diversification is a good alternative for investment, for this you must be clear about the objective you want, to have savings or investment.
It is recommended that you seek to invest in products that provide additional income to be able to compensate for the rise in prices that normally occur year after year, this due to inflation. For this we have to ask ourselves if the stock market is the best option among other options. When it happens that inflation is reaching high levels, it is recommended that the investor pay attention to factors such as technology or renewable energies, which are sectors that are being re-increased.
Conclusions
It is really important to pay attention to the currency that you want to invest, for example, dollars, year after year, its value has grown, so an investment is recommended for these, but you must take into account the exchange rate of the National currency.
Inflation is extremely important data for decision making, because we know that our money does not have the same value last year as it was this year. You should always take this information into account and know that you should always have risks. At higher risks we can have higher income, but for this, the aspects in which we want to invest must be clearly studied.
Bibliography
- José Luis Álvarez. (2017). WHAT IS THE RELATIONSHIP BETWEEN INFLATION AND THE INTEREST RATE? August 8, 2017, from El Contribunador Website: https://www.elcontribuandante.mx/2017/08/cual-es-la-relacion-entre-la-inflacion-y-la-tasa-de-interes/Tomás de la Rosa. (2017). How does the rise in interest rates affect my investments? May 2, 2017, from Finamex Website: http://www.finamex.com.mx/en/the-visionary/actualidad/como-impacta-en-mis-inversiones-el-alza-en-las-tasas-de -interests / MIGUEL ÁNGEL GARCÍA MUÑOZ. (2015). Inflation and investments. 25 JUL 2015, from El País Website: https://elpais.com/economia/2015/07/24/actualidad/1437734268_330858.html(2017). Exchange rate. 2017, from Banxico Website: http://educa.banxico.org.mx/banco_mexico_banca_central/sist-finc-tipo-cambio.html Sofia Macías. (2018).How does the rise in interest rates affect my finances? June 22, 2018, by Little Capitalist Pig Website: https://www.pequenocerdocapitalista.com/como-afecta-la-subida-de-tasas-interes-mis-finanzas/How does the exchange rate affect your investments?. 2018, from Practical Finance, Cristina Gil. (2017). How does inflation affect my money? 02/16/17, from Eurekers Website:
