Real Interest Rate
What is Real Interest Rate?
An interest rate adjusted for inflation.
Understanding Real Interest Rate
The nominal rate is what a loan or deposit states; the real rate is what you earn or pay in purchasing power. The Fisher equation approximates it as the nominal rate minus inflation.
Real rates drive saving and investment decisions; a negative real rate means money in the bank loses value even as the balance grows.
Formula
Example
A 5% savings rate with 3.7% inflation gives a real return of about 1.3%.