What is a real interest rate? What your interest earns after inflation
By SendPay Business · · 2 min read
A real interest rate is the interest rate after taking inflation into account. It tells you how much more your money can actually buy at the end of a year, rather than just how many more pounds you have.
Nominal and real
The rate a bank or lender quotes is the nominal rate. If prices rise over the same period, part of that interest only keeps up with them. What is left over is the real rate.
How to work it out
- Quick estimate: the interest rate minus inflation. 5% interest with 3% inflation is about 2% real.
- Exact: (1 + interest rate) divided by (1 + inflation), minus 1. For 5% and 3% that is 1.05 / 1.03 − 1, or about 1.94%.
- The two give almost the same answer when rates are low, and drift apart when inflation is high.
When real rates are negative
If inflation is higher than the interest earned, the real rate is negative: savings grow in pounds but buy less than they did. Borrowers see the opposite effect, as inflation shrinks the real cost of a fixed-rate debt.
Why central banks watch them
Central banks set nominal base rates, but it is the real rate that shapes whether people are encouraged to save or to spend and borrow. Differences in real rates between countries can also move money between currencies.
Where SendPay fits
SendPay platforms include GBP, EUR and USD accounts and international transfers under your own brand, powered by licensed partners.
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Build my platform →Questions people ask
How do I work out my real interest rate?
Enter your rate and inflation into the free calculator to see the real rate and what your money is worth in today's terms.
Real interest rate calculator →What is a central bank base rate?
The rate a central bank sets that steers borrowing costs.
Base rates →How do interest rates affect exchange rates?
Higher rates can attract money into a currency and push it up.
Interest rates and FX →Read next
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. PayPal, Patreon and Substack are named as reference points only and are not affiliated with SendPay Business.