What "real" means here

A real interest rate is the return on your savings, or the cost of your borrowing, once inflation has been taken out of the number. The rate printed on a savings account or a mortgage statement is the nominal rate: the percentage the account pays or the loan charges before you account for the fact that prices are rising too. Subtract the inflation rate from the nominal rate and what is left is the real rate, the one that tells you whether your money is actually gaining ground or just standing still while everything it might buy gets more expensive.

Working it out

The arithmetic is a single subtraction, but the inputs need to be stated first. Take a nominal savings rate and the inflation rate measured by the Consumer Prices Index (CPI), published monthly by the Office for National Statistics. The figures below are illustrative only; your own account rate and the current CPI reading will differ, so the calculation needs redoing with those two numbers before it means anything for your own money.

• Nominal savings rate: 4 per cent a year (illustrative)
• CPI inflation: 2 per cent a year (illustrative)
• Real interest rate: 4 minus 2, so 2 per cent a year

A positive real rate like this means the money is growing in what it can buy. Reverse the inputs and the picture changes: a nominal rate of 4 per cent against inflation of 5 per cent gives a real rate of minus 1 per cent, so the balance is larger at the end of the year but buys less than it did at the start.

Savings and borrowing seen the same way

The same subtraction applies to what you owe. A mortgage or loan charging a nominal rate below the inflation rate is, in real terms, cheaper to carry than the headline figure suggests, because the debt is being repaid in money that is worth less each year. This is why a real interest rate shows what a rate actually does to a household's position over time. The base rate set by the Bank of England's Monetary Policy Committee (MPC) is a nominal figure too, and its own path is covered on the base rate reference page, alongside the decision it followed.

Where the numbers come from

Inflation figures used in this kind of calculation come from the Office for National Statistics, which publishes the CPI reading each month with the reference period stated alongside it. The Bank of England sets monetary policy against an inflation target of 2 per cent, and the base rate's history, with each decision date, is on the rate reference page. How a change in the base rate feeds through to the nominal rate on an account or a mortgage in the first place is a separate question, covered on how a base rate change reaches your money.