Real interest rates

The lesson in full

A 10% interest rate sounds great, unless prices rise 15%. What matters is the real interest rate: the interest rate minus inflation.
A 4% deposit with 3% inflation: a real rate of about +1%, so your buying power grows a little. 5% interest with 6% inflation: about −1%, so it shrinks.
Positive real rates reward saving and make borrowing expensive, which cools spending and inflation. Negative real rates do the opposite and heat the economy up.
Real example: at the end of 2021, US interest rates were near 0% while inflation was 7%, a real rate of about −7%. Rate hikes in 2022–23 pushed it back above zero.
Money flows to where real returns are better. A country with higher real rates tends to attract foreign savers, which can support its currency.
Common mistake
Mistake: comparing headline rates across countries. A 10% deposit where inflation is 12% is worse than 3% where inflation is 1%.
Key takeaway
Always subtract inflation. Real rate above zero: savers win. Below zero: borrowers win.

Real interest rate = ... Interest rate minus inflationIt shows what your money really earns in buying power.
5% interest with 6% inflation means your savings... Lose buying power5% − 6% = −1%: prices outpace your interest.
Positive real rates tend to... Cool the economySaving pays and borrowing costs more, so spending slows.
Which deposit is better in real terms? 3% with 1% inflation+2% real beats −2% real, however big the headline number.