Real interest rate
a.k.a. Real yield
The interest rate after inflation is subtracted: what your money actually gains in buying power.
In plain English
The interest rate after inflation is subtracted: what your money actually gains in buying power.
A savings account paying 5% sounds great until prices rise 4% a year. Your real interest rate is roughly the headline rate minus inflation: here, about 1%.
Currency traders watch real rates closely. Money tends to flow toward countries where it earns more after inflation, which can lift that country's currency. A negative real rate means cash is quietly melting while it sits.
Worked example
Rough real rate
- Headline interest rate: 5%.
- Inflation: 4%.
- 5% − 4% = 1%.
Bottom line: Your money's buying power grows about 1% a year.
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