Definition
The real interest rate is the nominal interest rate minus the rate of inflation. It measures the true reward to a lender, or the true cost to a borrower, in terms of purchasing power rather than currency units.
If a loan pays 5 percent interest while prices rise 3 percent, the real return is roughly 2 percent. The nominal rate states how many more dollars you receive; the real rate states how much more you can actually buy.
Why it matters
How it works
The Fisher equation links the three figures: the real rate approximately equals the nominal rate minus expected inflation. Because inflation is not known in advance, lenders form expectations and bake an inflation premium into nominal rates.
When inflation runs higher than expected, lenders lose and borrowers gain, because the loan is repaid in cheaper money. A negative real rate, where inflation exceeds the nominal rate, quietly transfers value from savers to borrowers and discourages holding money.