real interest rate

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The actual interest rate less the current rate of inflation. For example, if a building society is paying 5% interest and the rate of inflation is 3%, the real growth of a deposit held for a year in the building society is 2% - this is the real rate of interest. Real interest rates are used to calculate more accurate pre-tax returns on investment, i.e. by discounting inflation.

Subjects: Financial Institutions and Services.

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