This short revision video looks at the concept of real interest rates on savings and loans.
The real interest rate is the nominal interest rate adjusted for inflation
For example, if inflation is 4 percent, and the nominal interest rate on a loan is 6 percent, then the real interest rate = +2 per cent
Ceteris paribus, a higher real interest rate is good for savers but bad for borrowers especially those who have taken out big loans
Real interest rates can be negative e.g. if the annual rate of price inflation is higher than the nominal interest rate
The current Bank of England base rate (March 2020) is 0.25%.
It was cut on 11 March 2020, after staying at 0.75% since 2 August 2018.
The Bank of England said the move was to help households and small businesses affected by the coronavirus.
With consumer price inflation at 1.8%, then the real base rate of interest is negative
But many borrowers pay much higher nominal interest rates than this
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