Definition of Real interest Rate = Nominal interest rate – inflation.
There is a graph of UK real interest rates 1970 – 2004 here (too big for this blog format)
CPI inflation is currently 3.2% CPI Inflation
Base rates are currently 0.5%.
This means we have a negative real interest rate of – 2.7%
This is an unprecedented negative real interest rate. In theory it reduces incentive to save and encourages spending and borrowing.
2 comments ↓
In theory, banks should not buy bad investments… the caution generated by the economic crisis and uncertainty about job security etc… means that not many of the ‘ordinary men on the street’ will be throwing their money around quite as much as they have been used to doing… whatever the statistics say about real or imagined interest or inflation rates.
It’s definitely a time when you have to be especially interested in how your money and investments are working for you.
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