The CDI (Certificado de Depósito Interbancário), the Brazilian interbank deposit rate, is the main private benchmark for interest rates in Brazil. It is the basis for countless transactions: loans, debt, investments and inflation adjustments. But do you know where that number comes from?
Banks are banks. They want to make money, and nobody knows better how to put cash to work. That is why they never leave money sitting idle in an account, not even for a single night.
You should do the same. But that is a topic for another day.
All of a bank's cash is invested. Where? In other banks, of course. Banks that need money, to lend to individuals or companies, to buy bonds and so on, borrow from banks that have surplus cash. Banks are not generous even with each other, so these loans carry interest.
When one bank lends money to another without any collateral, the borrowing bank issues a certificate: the Certificado de Depósito Interbancário, or interbank deposit certificate. That is the CDI. These transactions usually last just one day, which is why we call them overnight. This is the 21st century, so all of it happens electronically and is registered at a clearing house called CETIP.
At the end of each day, CETIP calculates a weighted average of the interest rate charged on all these transactions and publishes it as the CDI. That rate then serves as the benchmark for millions of financial transactions, as if every other transaction earned or paid the same rate at which banks lend to each other. The point of all this is to answer one question: what is money worth today?
Got it. But how do banks set the rate at which they lend this money?
Lending banks would like to lend at the highest possible rate. Borrowing banks would like to pay the lowest possible rate. How do they reach an agreement and still stay on good terms with the regulator, the Central Bank of Brazil? They use as a benchmark the rate the Central Bank itself sets through Copom, its monetary policy committee: the Selic rate, Brazil's base interest rate.
Want to know more about the Selic rate? A new post is on the way.