What is the real interest rate?

An interest rate says how much money will grow, not what that money will buy. The real interest rate is what remains of the rate after inflation: it shows whether, and by how much, purchasing power grows or shrinks.

Nominal and real rates

The rate in a contract or announced by a central bank is the nominal rate: it measures the growth in the amount of money. The real rate sets that growth against the rise in prices, so it measures the change in purchasing power.

A hypothetical example: at 40% a year, 100 becomes 140. If prices rise by 30% over the same year, a basket that cost 100 at the start costs 130 at the end. The money has grown by 40%, its purchasing power by much less.

How is it calculated?

The usual shortcut is the simple difference: nominal rate minus inflation, here 40 − 30 = 10 percentage points. It is quick and intuitive, but only an approximation.

The exact calculation is the Fisher equation: real rate = (1 + nominal rate) ÷ (1 + inflation) − 1, with rates as decimals (0.40 for 40%). Here 1.40 ÷ 1.30 − 1 ≈ 0.077, a real rate of about 7.7%: the 140 buys about 1.077 baskets at the new price of 130.

When rates and inflation are low, the two methods barely differ: with a 3% rate and 2% inflation, the simple difference is 1 point and the exact result 1.03 ÷ 1.02 − 1, about 0.98%. The gap widens as both rise.

Past or expected inflation?

The choice of inflation figure also changes the result. There are two common approaches:

Backward-looking (ex post) real rate

Uses realised inflation, usually the latest published annual figure. The number is known and the same for everyone, but it describes the past 12 months.

Forward-looking (ex ante) real rate

Uses the inflation expected over the coming period. Expectations cannot be observed directly; they are estimated from surveys or inflation-linked bond prices, so results vary by source.

A deposit or loan made today is repaid in the future, and what that money is worth depends on the inflation in between. Monetary policy also works with a lag. So when judging how tight policy is, policymakers often look at the forward-looking real rate.

The two measures drift apart when inflation moves quickly. When it is falling, expected inflation is usually below the past 12 months' figure, so the forward-looking real rate is higher than the backward-looking one. When inflation is rising, the reverse is often true.

Negative and positive real rates

When the real rate is positive, the interest rate is above inflation: money earning it gains purchasing power, and borrowers repay more purchasing power than they received. When it is negative, the reverse holds: a growing balance still buys less, while the real burden of debt shrinks over time.

So a positive real rate generally restrains borrowing and spending and encourages saving; a negative one tends to do the opposite. These effects take time and vary in strength; the guide to what happens when rates change covers them in more detail.

A positive real rate does not by itself mean policy is tight. Economists compare it with the neutral rate, which neither speeds up nor slows down the economy, but which can only be estimated, not observed.

The real rate table on this site

The real interest rate table subtracts the latest published annual consumer price inflation from each economy's policy rate. So it is a backward-looking measure based on the simple difference: rough, but consistent across economies.

• Rate: each central bank's current policy rate (for the ECB, the deposit facility rate). The Fed announces a target range rather than a single rate, so its midpoint is used.
• Inflation: the annual rise in consumer prices, the latest figure published for each economy.
• Timing: the inflation figure covers a past period, usually the previous month, and comes out within a few days to a few weeks of that period ending. The rate is today's; the inflation figure is from the past. The figures in the table change with both rate decisions and new inflation data.

Real rates quoted in the news or by central banks may differ from the table if they use expected inflation or another inflation measure.

What the table leaves out

• Deposit and loan rates are not the policy rate. Banks' rates can sit below or above it depending on maturity, amount and risk.
• Taxes and fees are ignored. Tax on interest income (such as withholding tax on deposits) and loan fees change what is actually kept or paid.
• There is no single inflation measure. Headline inflation covers the whole basket; core inflation excludes volatile items such as energy and food, with definitions varying by country. A central bank may also target another measure: the Fed's 2% target uses the personal consumption expenditures (PCE) price index.

Short definitions of the terms used here are in the glossary.