The real interest rate is the nominal interest rate adjusted for inflation, reflecting the true cost of borrowing or the actual return on savings and investments. It is calculated using the formula:

Real Interest Rate = Nominal Interest Rate − Inflation Rate

For example, if a bank offers a 5% nominal interest rate on a savings account, but inflation is 3%, the real return is only 2%. This means the purchasing power of the money grows by just 2% annually.

Why is it Important?
Investor Decisions – Helps assess whether investments will outpace inflation.

Central Bank Policies—This influences monetary policy, as negative real rates (when inflation is higher than> the nominal rate) can encourage spending and borrowing.

Economic Growth – High real rates may discourage borrowing, while low or negative rates can stimulate economic activity.

Unlike nominal rates, which are published by banks, real interest rates provide a clearer picture of financial health. Investors, businesses, and policymakers rely on them to make informed decisions in an inflationary environment.