Real interest rates are back in the spotlight as Australia enters 2025 with shifting inflation, changing RBA policy, and a renewed focus on the true value of your money. Whether you’re saving for a home, borrowing for a car, or investing for retirement, understanding real interest rates can mean the difference between growing your wealth and falling behind.
What Is the Real Interest Rate?
The real interest rate is the return you actually earn (or pay) after accounting for inflation. While the nominal interest rate is the headline number you see on loans and savings accounts, the real rate reveals your true purchasing power.
- Formula: Real Interest Rate = Nominal Interest Rate – Inflation Rate
- Example: If your savings account offers 5% interest and inflation is running at 4%, your real interest rate is only 1%.
This subtle distinction has a big impact on your financial wellbeing.
Why Real Interest Rates Matter in 2025
Australia’s economic landscape in 2025 is shaped by several trends:
- Persistent but moderating inflation: The latest ABS data shows inflation easing to around 3.2% in early 2025 after peaking above 7% in recent years.
- RBA’s cash rate policy: The Reserve Bank has kept the cash rate at 4.35% since late 2024, with markets anticipating no major cuts until inflation is firmly back in the 2–3% target range.
- Bank deposit and loan rates: Term deposits and high-interest savings accounts are advertising rates between 4.5% and 5.5%, while standard variable mortgage rates sit above 6% at most major lenders.
With inflation still eroding purchasing power, the real yield on many savings products remains slim. For borrowers, high nominal rates mean higher repayments, but if inflation falls, the real cost of debt rises too.
How Real Interest Rates Impact Your Finances
Let’s break down the practical effects for savers, borrowers, and investors:
Savers: Protecting Your Money from Inflation
Many Australians are finding that even “high” savings rates barely keep up with living costs. For example, a $10,000 term deposit at 5% nominal interest earns $500 in a year. If inflation is 4%, the real gain is only $100 — barely enough to cover rising grocery or energy bills.
- Look for accounts with rates above inflation to grow your wealth in real terms.
- Consider inflation-linked bonds or diversified investments for better long-term protection.
Borrowers: The True Cost of Debt
If you have a mortgage or personal loan, the real interest rate determines how quickly your repayments erode the true value of your debt. When inflation is high, the real cost of fixed-rate debt can shrink over time. But with inflation easing and rates staying high, new borrowers in 2025 are feeling the pinch of both high nominal and real rates.
- Refinancing may make sense if you can lock in a lower nominal rate as inflation falls.
- Be wary of variable-rate loans that could remain expensive if inflation drops further.
Investors: Chasing Real Returns
Australian shares, property, and superannuation funds have all faced volatility as markets digest the new normal for rates and inflation. The real interest rate is a key benchmark for deciding whether riskier investments are worthwhile compared to “safer” cash products.
- Compare the expected real return of shares or property to the real yield on cash and bonds.
- Watch for changes in RBA policy — a rate cut could boost asset prices but reduce real yields on cash.
What to Watch: Policy Shifts and Economic Signals
As 2025 unfolds, keep an eye on:
- RBA statements: Any hint of changing the cash rate could quickly shift both nominal and real rates.
- Inflation figures: Monthly CPI updates will determine whether real rates improve for savers or become tougher for borrowers.
- Bank offers: New deposit and loan products may offer better real returns as competition heats up in a stabilising economy.
Staying informed about these factors will help you make smarter decisions in a high-stakes environment.
