Real interest rates are those that have been calculated after taking the effects of inflation into account. These rates can be used to calculate the returns on various deposits, loans, and advances that have been adjusted for inflation. As a result, it captures the true cost of borrowing for the borrower; nonetheless, cost is not typically derived from it.
Real Interest Rate = Nominal Interest Rate – Actual or Anticipated Rate of Inflation
The real interest rate would be calculated as follows if you made a £1,000 fixed deposit with a 2% yearly interest rate but 2% inflation for that year.
Actual or expected inflation equals 2%, regardless of the nominal interest rate.
The Real Interest Rate is calculated as the Nominal Interest Rate minus the actual or anticipated rate of inflation.
