Real interest rate: Difference between revisions
imported>John Grout (To create the entry) |
imported>Doug Williamson m (Add "approximately" to the calculated real interest rates. Cross reference the Real page, where the compounding/decompounding version of the calculation is illustrated.) |
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An interest rate, paid or received, after excluding the effects of inflation. | An interest rate, paid or received, after excluding the effects of inflation. | ||
Thus if the expected rate of inflation is 4% and one may borrow at 6% nominal on a similar compounding basis, the real rate of interest may be taken as +2%. If one could borrow at 3% nominal, the real rate would be -1%. | Thus if the expected rate of inflation is 4% and one may borrow at 6% nominal on a similar compounding basis, the real rate of interest may be taken as approximately +2%. If one could borrow at 3% nominal, the real rate would be approximately -1%. | ||
Do not overlook the possibility of negative nominal interest rates. Central banks have been known to "pay" negative interest rates on banks' deposits with them - and some have achieved the same effect by imposing equivalent charges. Even with a negative nominal interest rate, the real rate of interest may be positive or negative according to the nominal rate's relationship with the expected rate of inflation (that may itself be positive or negative). | Do not overlook the possibility of negative nominal interest rates. Central banks have been known to "pay" negative interest rates on banks' deposits with them - and some have achieved the same effect by imposing equivalent charges. Even with a negative nominal interest rate, the real rate of interest may be positive or negative according to the nominal rate's relationship with the expected rate of inflation (that may itself be positive or negative). | ||
* Warning. Of course the use of "expected" inflation above means that, because different people will have different views on inflation, the real rate of interest is an estimate varying, perhaps significantly, according to who is making the estimate. | * Warning. Of course the use of "expected" inflation above means that, because different people will have different views on inflation, the real rate of interest is an estimate varying, perhaps significantly, according to who is making the estimate. | ||
== See also == | |||
* [[Real]] | |||
Revision as of 17:28, 13 July 2014
An interest rate, paid or received, after excluding the effects of inflation.
Thus if the expected rate of inflation is 4% and one may borrow at 6% nominal on a similar compounding basis, the real rate of interest may be taken as approximately +2%. If one could borrow at 3% nominal, the real rate would be approximately -1%.
Do not overlook the possibility of negative nominal interest rates. Central banks have been known to "pay" negative interest rates on banks' deposits with them - and some have achieved the same effect by imposing equivalent charges. Even with a negative nominal interest rate, the real rate of interest may be positive or negative according to the nominal rate's relationship with the expected rate of inflation (that may itself be positive or negative).
- Warning. Of course the use of "expected" inflation above means that, because different people will have different views on inflation, the real rate of interest is an estimate varying, perhaps significantly, according to who is making the estimate.
