Real interest rate

A “real” interest rate accounts for the impact of inflation on a given rate of interest. It’s very important to your returns.

A “real” interest rate is simply an interest rate that has been adjusted to take inflation into account. (A “nominal” interest rate is one that has not been adjusted for inflation.) Real rates matter because inflation reduces the value of any future stream of income. 

Take a bank account into which you plan to place £1,000. If inflation is running at 1% then a 2% nominal interest rate looks respectable – your savings will have more purchasing power a year from now. However, if inflation is running at 3%, your savings will have less purchasing power when you withdraw them in a year’s time, even though the £1,000 will have grown (in nominal terms) to £1,020. Of course, the advertised rate on a savings account will be the nominal one, not the real one. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
MoneyWeek

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.