Real Interest Rate

Real interest rate is the interest rate that has been adjusted for inflation. It reflects the real cost or return on borrowing or savings after taking into account the change in purchasing power due to inflation.

For example, if you have a savings account with a nominal interest rate of 3% and the inflation rate is 5%, the real interest rate would be -2%. This means that even though your savings are growing at 3% nominally, your purchasing power has decreased and is actually 2% lower than it was the year prior because inflation is eroding the value of your money at a higher rate than the interest earned.

So, the real interest rate is important as it gives the borrower or investor a clearer picture of how much they are actually earning or paying after taking inflation into account.