HOMEPAGE

Real Interest Rate

Definition

The Real Interest Rate adjusts the nominal interest rate for inflation, showing the true cost of borrowing or the true return on savings.

$$\text{Real Rate}=\text{Nominal Rate}-\text{Inflation Rate}$$

Why It Matters

• Determines real borrowing costs for consumers and businesses.
• Drives investment, savings behavior, and economic growth.
• Central banks monitor real rates to guide monetary policy.

Interpretation

• Positive real rate: Money grows in purchasing power.
• Negative real rate: Inflation erodes returns — borrowing becomes cheaper in real terms.

Example

Nominal rate = 6% Inflation = 4%

$$\text{Real Rate}=6\mathrm{\%}-4\mathrm{\%}=2\mathrm{\%}$$