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What is the real interest rate?

John Morris

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  • 2 weeks later...

The interest rate is the cost of the credit or the return on savings. The interest rate may be nominal (agreed and paid) or real.

The real interest rate depends on the money buying power that usually decreases over time as prices rise as a result of inflation.

Debtors or depositors can determine the real interest rate for their loans and savings, lowering the money purchasing power from the nominal interest rate.

For example, for $1,000 one-year account, the nominal rate is 2.5%, which means that after one year the depositor will receive $1,025. But if prices rise by 3% then the depositor will need $1,030 for products that cost $1,000 a year ago.

How calculate real interest rate?
Nominal rate - Inflation = Real interest rate
2.5% - 3% = - 0.5%

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