Real Interest Rate

A real interest rate is a nominal interest rate adjusted for inflation — broadly the policy rate or bond yield minus the inflation rate. It shows what a saver actually earns in purchasing power, which is why currency markets often care more about real rates than about headline nominal ones. When a central bank holds rates below inflation, the real rate is negative and the currency can weaken even though nominal yields look attractive. Comparing real yields between two countries, sometimes called the real rate spread, gives a cleaner read on relative policy tightness than comparing headline rates. Shifts in real yield spreads frequently line up with medium-term moves in major currency pairs.