Cadence Research · Reviewed 2026-07-30
What is the real interest rate?
The real interest rate is an interest rate after allowing for inflation. A simple approximation subtracts expected inflation from the nominal interest rate. If a policy rate is 4% and expected inflation is 2%, the real rate is roughly 2%. Policymakers use real rates to judge how restrictive or supportive borrowing conditions may be.
Why it matters
A nominal rate can stay unchanged while inflation expectations fall, making policy effectively tighter. Real rates help explain why the same policy-rate level can have different effects over time.
How it appears in official communication
Officials may discuss inflation expectations, the restrictiveness of financial conditions, or whether policy is sufficiently tight to return inflation to target.
A common misunderstanding
There is no single universally agreed real rate. The relevant inflation expectation, maturity, and borrower can all differ.
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Related guides
Primary sources
- Monetary Policy: What are its goals? (Federal Reserve)
- Monetary policy (European Central Bank)
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