Real interest rates explained

What a real interest rate is

A nominal interest rate is the rate you see quoted: on a deposit, a bond or a central bank policy rate. A real interest rate is that rate after removing inflation. It shows how much purchasing power a lender actually gains or loses.

If a deposit pays less than inflation, your money grows on paper but buys less over time. In that case the real rate is negative. If the deposit pays more than inflation, the real rate is positive.

Markets care about real rates because they show how tight or loose monetary policy really is. A high nominal rate is not restrictive if inflation is even higher.

Real interest rate formula

The common approximation is:

Real interest rate ≈ nominal interest rate − expected inflation

This is a simplified form of the Fisher equation. The exact Fisher equation divides rather than subtracts. The gap between the two versions only matters when inflation is high, which is relevant for economies such as Pakistan.

There are two versions in use:

Markets trade on the ex-ante version. Expected inflation comes from surveys, central bank projections, or market prices such as inflation-linked bonds.

For background on inflation measures, see Inflation explained and Consumer Price Index.

TIPS: the market measure of US real rates

TIPS (Treasury Inflation-Protected Securities) are US government bonds whose principal is adjusted for US CPI. Their yield is effectively a real yield, because the inflation compensation is paid separately through the principal adjustment.

Two measures follow from this:

• TIPS yield: the market's real interest rate for that maturity.
• Breakeven inflation: the nominal Treasury yield minus the TIPS yield of the same maturity. This is the inflation rate the market is pricing in.

So the formula also works the other way: nominal yield = real yield + breakeven inflation. When nominal yields rise, traders check whether the move came from real yields or from inflation expectations. The two have different effects on markets.

Official TIPS yields are published by the US Treasury. Auction dates are on the official Treasury auction calendar. More on nominal yields is in Bond yields and FX and Yield curve.

Real rates and gold

Gold pays no interest. Holding it means giving up the real return available on safe bonds. That forgone return is the opportunity cost of holding gold.

• When real yields rise, the opportunity cost of gold rises. Gold has often come under pressure in such periods.
• When real yields fall or turn negative, the opportunity cost falls. Gold has often found support.

This link is a tendency, not a rule. Central bank gold buying, safe-haven demand during crises, and the US dollar can override it for long periods. See What moves gold and Safe-haven assets.

Real rates and forex

In forex, capital tends to move towards currencies that offer higher real returns, all else equal. What matters is the real rate differential between two economies, not the nominal rates alone.

Typical patterns traders watch:

• Rising US real yields have often coincided with a firmer US dollar. See US Dollar Index.
• A currency with high nominal rates but higher inflation may not attract inflows, because its real rate is low.
• The differential also affects swap, the overnight financing charge or credit on a leveraged position. See Swap fees.

Risk sentiment, capital controls and the exchange rate regime can weaken these links. Read Interest rates and currencies and Exchange rate regimes.

How markets typically react around releases

Real rates move most around scheduled events:

1. Central bank decisions. A hawkish surprise usually lifts real yields. A dovish surprise usually lowers them.
2. CPI releases. A higher-than-expected print can raise breakevens, real yields, or both. The split depends on how the market expects the central bank to respond.
3. Labour data, such as Non-farm payrolls, changes rate expectations and real yields with them.

Take event dates only from official calendars: the Federal Reserve's FOMC calendar, the US Bureau of Labor Statistics release schedule, and the State Bank of Pakistan's monetary policy calendar. The market reaction depends on the surprise versus expectations, not on the headline number alone. See Economic surprises and Economic calendar guide.

Real rates in Pakistan

To estimate Pakistan's real policy rate, take the SBP policy rate and subtract inflation. Use official inflation data from the Pakistan Bureau of Statistics, or the inflation outlook in SBP monetary policy statements.

The latest SBP decision on our record: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Check the SBP website for any later decision before using this figure. More detail is in SBP rates and economy.

Risk note

Real rates explain tendencies. They do not predict prices. Leveraged forex and CFD trading can lose money fast, sometimes more quickly than any macro relationship plays out. Read Risk management and, for the legal position in Pakistan, Law and regulators.

Frequently asked questions

What is the real interest rate in simple terms?

It is the nominal interest rate minus inflation. It shows the change in purchasing power a lender gets.

Can a real interest rate be negative?

Yes. When inflation is higher than the nominal rate, the real rate is negative and savers lose purchasing power.

Why do traders watch TIPS yields?

TIPS yields are a market-priced measure of US real interest rates. They update during trading hours, so they react to news as it happens.

Do rising real rates always push gold down?

No. The relationship has been common, but safe-haven demand, central bank buying and dollar moves can break it.

Which inflation figure should I use in the formula?

Use expected inflation to understand market pricing. Use measured inflation to check what returns actually were. Take both only from official sources.