What are real interest rates and why do they matter so much?

When talking about economics and investments, many people ask themselves what is real interest and why this concept directly affects everyday financial decisions.

Although the term may seem technical, understanding its logic is essential for evaluating gains, losses, and even the long-term security of investments.

In this article, you'll clearly understand what real interest rates are, how they influence the financial lives of families and businesses, what factors determine them, and why they are crucial in a scenario of unstable inflation.

At the end, you'll see practical examples, a comparison table, and answers to the most common questions on the topic.

What is real interest: the essential concept

In simple terms, real interest corresponds to the return on an investment or the interest rate of an economy discounted for inflation.

In other words, they reveal the effective gain in purchasing power of those who invest or lend money.

For example, if a government bond yields 10% per year and inflation is 6%, the real interest rate is 4%. Doesn't that sound like a lot?

Think of the analogy of filling a leaky bucket: no matter how much water you pour, some always escapes.

Inflation acts like this hole, eroding nominal gains. What's left, in fact, is the real interest rate.

Another essential aspect is that real interest rates are not limited to investment calculations. They also function as a thermometer of a country's economic health.

The more consistent and predictable, the more confidence economic agents will have in the future of that economy.

This clarity is crucial for long-term decisions, such as saving for retirement or financing large projects.

After all, no one wants to invest in a scenario where nominal gains are high but eroded by inflation in a few months.

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Why are real interest rates so important?

The relevance of real interest rates lies in the impact they have on practically all areas of the economy.

Investors use them to decide where to invest resources, companies consider them to plan financing, and governments need to balance them to ensure sustainable growth.

A very high real interest rate, for example, attracts foreign capital and strengthens the national currency. On the other hand, it makes credit more expensive and can curb consumption.

A negative real interest rate, when inflation exceeds the nominal rate, discourages savings and generates capital flight.

Imagine a worker who saves money and realizes that, at the end of the year, his earnings were not enough to buy the same items he could have bought before.

This feeling of loss comes not just from inflation itself, but from the lack of a real return on what you saved.

According to the World Bank, countries with persistently negative real interest rates tend to face greater financial instability and difficulty in attracting productive investment (source).

This shows that this is not a concept restricted to specialists, but something that directly affects the lives of millions of people.

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The real interest formula

The most commonly used way to calculate real interest is the approximate Fisher equation:

Real interest ≈ Nominal interest – Inflation

While simple, this calculation provides only an estimate. For greater precision, the exact formula considers the relationship between inflation rates and the nominal rate.

See the comparison in different scenarios:

This table demonstrates how inflation can turn a seemingly high gain into a real loss.

Many beginners in the world of investing are surprised to realize that, even when investing in something "profitable," they can lose purchasing power if inflation is not taken into account.

It's like running on a treadmill: you expend energy, but you don't move forward. The same happens with investments that pay high nominal interest rates but yield no real gains.

Additionally, understanding the formula helps consumers better negotiate loans and financing.

A rate that appears attractive in the contract may ultimately represent a loss compared to the inflation rate for the period.

Practical everyday examples

To better understand, think about two different scenarios:

• Example 1: You invest R$10,000 in a CDB that yields R$91,000 per year. If inflation during the period is R$41,000, your real gain will be close to R$51,000. In this case, your money has appreciated in value.
• Example 2: A mortgage is contracted with interest of 8% per year. If inflation reaches 10%, the real cost of this loan will, in practice, be lower, as the debt is eroded by the currency's loss of purchasing power.

In both cases, real interest rates determine who wins: the investor or the debtor.

This is exactly why economists highlight this indicator as one of the most important in macroeconomics.

An interesting point is that, for families, this calculation is not just a paper bill.

It affects decisions as personal as investing in a retirement plan, investing in fixed income, or even changing cars next year.

Read also: Inflation and Interest Rates: What Every Investor Needs to Know in 2025

The impact of real interest rates on investments

Investors closely monitor real interest rates to define allocation strategies. Treasury bonds, fixed-income funds, and even savings accounts are directly influenced by this indicator.

According to a survey by the Central Bank of Brazil in 2024, the country recorded real interest rates above 6% per year, one of the highest in the world.

This level attracted foreign capital inflows, increased the value of the real, but also made domestic credit more expensive.

Another little-discussed detail is how real interest rates influence the relationship between risk and return.

When they are very high, even conservative investments seem attractive, reducing the appetite for riskier assets, such as stocks or startups.

However, in low or negative real interest rate environments, investors tend to seek higher-risk alternatives to protect their assets, moving into technology, innovation, and even cryptocurrency sectors.

How Real Interest Rates Affect Businesses and Consumers

Investors aren't the only ones concerned about this issue. Companies need to calculate the real cost of financing to expand operations, while consumers evaluate whether it's worth investing in fixed income, buying a property with financing, or saving.

An environment of high real interest rates tends to discourage financed consumption, as installments become heavier.

For small investors, it can be an opportunity to guarantee real gains in conservative investments.

For consumers, a practical way to understand the impact is to compare savings returns with price changes at the supermarket.

If prices rise faster than the investment's returns, it becomes clear that the gain is illusory.

Companies, when planning long-term investments, need to evaluate the real cost of credit.

Projects that appear viable at nominal rates may become unsustainable when real interest rates and inflation volatility are considered.

Real interest rates in the global scenario

The discussion about what is real interest gains even more strength when compared to other countries.

Developed economies such as the United States and the Eurozone have maintained relatively low nominal interest rates in recent years, which causes their real interest rates to fluctuate close to zero or even negative in certain periods.

Emerging countries, such as Brazil and Mexico, historically have higher real interest rates, due to inflationary instability and the need to attract foreign capital.

This difference explains why international investors seek emerging markets for profitability, but also face greater risks.

This global disparity shows how real interest rates function as a reflection of confidence in economic policy.

While stable countries manage to maintain low and predictable rates, unstable nations resort to high interest rates as a way to offset risks.

A study by the BIS (Bank for International Settlements) showed that sharp fluctuations in real interest rates are directly linked to exchange rate crises and instability in financial markets (source).

This proves how the topic is global and influences everyone from large corporations to individual investors.

FAQ: frequently asked questions

1. Are real interest and nominal interest the same thing?
No. Nominal interest represents the gross rate offered on an investment or charged on a loan. Real interest discounts inflation, showing the effective gain or cost.

2. Why are real interest rates in Brazil usually high?
Brazil has a history of high inflation, fiscal risk, and a need to attract foreign capital. These factors lead central banks to maintain high nominal rates, resulting in high real interest rates.

3. Are negative real interest rates always bad?
Not necessarily. In times of economic stimulus, governments may accept negative real interest rates to encourage consumption and productive investment. However, over a prolonged period, they discourage savings.

4. How to monitor real interest rates on a daily basis?
Reports from the Central Bank, financial institutions, and economic portals provide up-to-date data on inflation and interest rates. Consulting these indicators helps you make more informed decisions.

Conclusion

Understanding what is real interest It's more than a technical curiosity. It's practical knowledge, capable of guiding financial choices and explaining why certain economies thrive while others face cycles of instability.

By observing the relationship between nominal interest rates and inflation, consumers, businesses, and governments can better prepare for risk scenarios, identify investment opportunities, and make decisions with greater confidence.