Real Interest Rate

The real interest rate is the nominal rate minus inflation. A bank paying 4% while prices rise 3% has increased your purchasing power by only 1%.

The calculation matters because the number and the experience diverge. A 10% rate looks attractive until you note prices rising 12% — then saving loses money. Rates always belong beside inflation.

When real rates are negative, holding cash is itself a loss. People moving into property and equities in such periods is a natural response.

For borrowers it reverses. Low or negative real rates make the real burden of a loan lighter over time, which is why fixed-rate borrowing favours you during inflation.

Central banks watch the real rate, not the nominal one. Prices rising 5% against a 3% policy rate means the real rate is negative — policy is still loose, not tight. The calculation also shifts with expectations. A real rate computed from past inflation and one computed from expected inflation can differ meaningfully.