Unit 2 Macro: Real Interest Rates

The real rate of interest is important to businesses and consumers when making spending and saving decisions. The real rate of return on savings, for example, is the money rate of interest minus the rate of inflation.

So if a saver is receiving a money rate of interest of 6% on his savings, but price inflation is running at 3% per year, the real rate of return on these savings is only + 3%.

Real interest rates become negative when the nominal rate of interest is less than inflation, for example if inflation is 5% and nominal interest rates are 4%, the real cost of borrowing money is negative at -1%.

Real interest rates for the UK

Data from Timetric.

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United Kingdom from Timetric