Real interest rate
Also called: real rate
An interest rate after allowing for inflation. It shows the gain in buying power.
The exact real rate is (1 + nominal rate) ÷ (1 + inflation) − 1; subtracting inflation from the nominal rate gives a close approximation when both are small. When inflation exceeds the interest rate, the real rate is negative and savers lose buying power.
Example
A 7% deposit with 5% inflation gives a real rate of (1.07 ÷ 1.05) − 1, about 1.9%.
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