Livejournal nominal and real interest rates. Nominal and real deposit rate

Percentage is absolute value. For example, if 20,000 is borrowed and the debtor must return 21,000, then the interest is 21,000-20,000=1000.

The lending interest rate (norm) - the price for using money - is a certain percentage of the amount of money. Determined at the point of equilibrium between the supply and demand of money.

Very often in economic practice, for convenience, when they talk about loan interest, they mean the interest rate.

There are nominal and real interest rates. When people talk about interest rates, they mean real interest rates. However, actual rates cannot be directly observed. By concluding a loan agreement, we receive information about nominal interest rates.

Nominal rate (i)- quantitative expression of the interest rate taking into account current prices. The rate at which the loan is issued. The nominal rate is always greater than zero (except for a free loan).

Nominal interest rate- This is a percentage in monetary terms. For example, if for an annual loan of 10,000 monetary units, 1,200 monetary units are paid. as interest, the nominal interest rate will be 12% per annum. Having received an income of 1200 monetary units on a loan, will the lender become richer? This will depend on how prices have changed during the year. If annual inflation was 8%, then the lender’s income actually increased by only 4%.

Real rate(r)= nominal rate - inflation rate. The real bank interest rate can be zero or even negative.

Real interest rate is an increase in real wealth, expressed as an increase in the purchasing power of the investor or lender, or the exchange rate at which today's goods and services, real goods, are exchanged for future goods and services. The fact that the market rate of interest would be directly influenced by inflationary processes was the first to suggest I. Fischer, which determined the nominal interest rate and the expected inflation rate.

The relationship between the rates can be represented by the following expression:

i = r + e, where i is the nominal, or market, interest rate, r is the real interest rate,

e - inflation rate.

Only in special cases, when there is no price increase in the money market (e = 0), do real and nominal interest rates coincide. The equation shows that the nominal interest rate can change due to changes in the real interest rate or due to changes in inflation. Since the borrower and lender do not know what rate inflation will take, they proceed from the expected rate of inflation. The equation becomes:

i = r + e e, Where e e expected inflation rate.

This equation is known as the Fisher effect. Its essence is that the nominal interest rate is determined not by the actual rate of inflation, since it is unknown, but by the expected rate of inflation. The dynamics of the nominal interest rate repeats the movement of the expected inflation rate. It must be emphasized that when forming a market interest rate, it is the expected inflation rate in the future, taking into account the maturity of the debt obligation, that matters, and not the actual inflation rate in the past.

If unexpected inflation occurs, then borrowers benefit at the expense of lenders, since they repay the loan with depreciated money. In the event of deflation, the lender will benefit at the expense of the borrower.

Sometimes a situation may arise where real interest rates on loans are negative. This can happen if the inflation rate exceeds the growth rate of the nominal rate. Negative interest rates can be established during periods of runaway inflation or hyperinflation, as well as during an economic downturn, when demand for credit falls and nominal interest rates fall. Positive real interest rates mean higher income for lenders. This occurs if inflation reduces the real cost of borrowing (credit received).

Interest rates can be fixed or floating.

Fixed interest rate is established for the entire period of use of borrowed funds without the unilateral right to revise it.

Floating interest rate- this is the rate on medium- and long-term loans, which consists of two parts: a moving basis, which changes in accordance with the market market conditions and a fixed amount, usually unchanged throughout the entire period of lending or circulation of debt

The Nominal Interest Rate is the market interest rate, excluding inflation, that reflects the current valuation of monetary assets.

The Real interest rate is the nominal interest rate minus the expected inflation rate.

For example, the nominal interest rate is 10% per annum and the projected inflation rate is 8% per annum. Then the real interest rate will be: 10 - 8 = 2%.

Nominal and real inflation rate

The difference between the nominal rate and the real rate makes sense only in conditions of inflation or deflation. American economist Irving Fisher suggested a connection between the nominal and real interest rates and inflation, called the Fisher effect, which states: the nominal interest rate changes by the amount at which the real interest rate remains unchanged.

In formula form, the Fisher effect looks like this:

i = r + πe

where i is the nominal interest rate;
r is the real interest rate;
πe is the expected inflation rate.

For example, if the expected inflation rate is 1% per year, the nominal rate will increase by 1% for the same year, therefore, the real interest rate will remain unchanged. Therefore, it is impossible to understand the investment decision-making process of economic agents without taking into account the difference between the nominal and real interest rates.

Let's take a simple example: let's say you intend to give someone a loan for one year in an inflationary environment, what exact interest rate will you set? If the growth rate of the general price level is 10% per year, then by setting the nominal rate at 10% per annum for a loan of 1000 rubles, you will receive 1100 rubles in a year. But their real purchasing power will no longer be the same as it was a year ago.

Nominal increase in income amounting to CU 100. will be “eaten up” by 10% inflation. Thus, the distinction between the nominal interest rate and the real interest rate is important for understanding how exactly contracts are concluded in an economy with an unstable general price level (inflation and deflation).

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Real interest rate - It is the nominal rate minus the rate of inflation over a given period. If the rate of depreciation of money exceeds the nominal rate, then the real interest rate turns negative (negative). The equalization of national interest rates occurs not only as a result of the movement of short-term capital between countries, but also depending on the dynamics of exchange rates. Typically, the higher the exchange rate, the lower the interest rate on deposits in this euro currency. For example, the gap in interest rates on deposits in different eurocurrencies sometimes reached 10-15 points.

International interest rates apply to European loans. Typically, LIBOR is 1/8 point above the deposit rate and 1/2 point below the interest rate on loans to the end borrower. By analogy with LIBOR, other world financial centers charge: in Bahrain - BIBOR, Singapore - SIBOR, Frankfurt am Main - FIBOR, Paris - PIBOR, Luxembourg - LUXIBOR, etc.

Hidden elements of the loan cost include other costs associated with obtaining and using the loan and not mentioned in the agreement. These include inflated prices of goods on company loans; forced deposits in the prescribed amount from the loan; requiring credit insurance from a specific insurance company affiliated with the bank; payment by the bank of a commission for the collection of trade documents, etc. Some elements of the cost of a loan cannot be assessed in monetary terms, although their significance is great, for example, for establishing control over a foreign company or borrowing country. The seemingly favorable terms of some international loans are combined with exorbitant hidden costs that are costly to the borrower.

In the postwar period, the United States was a near-monopoly international creditor. For 1946-1950 the amount of government loans and US assistance to other countries amounted to $30.2 billion. Approximately 2/3 of these loans came from Western European countries. The largest loan was from Great Britain ($3,750 million for 50 years at 2% per annum under an agreement dated December 6, 1945). The apparently preferential terms of this loan were combined with a number of demands on Great Britain: abolishing exchange restrictions and introducing convertibility of the pound sterling into dollars; remove barriers to the penetration of American capital into the sterling zone; release sterling debt to expand American exports. The loan was used over three years, with the UK overpaying, buying raw materials at high prices. Following Great Britain, France became a debtor to the United States. According to the Franco-American agreement of May 28, 1946, the United States provided France with a loan of $650 million for a period of 35 years in order to use almost half of the loan for the purchase of American military materials preserved after the war in France, as well as with the condition of providing customs benefits for American goods.

A specific form of financial support for the positions of Western Europe, shaken as a result of the war, was the US aid program under the plan of J. C. Marshall (named after the former US Secretary of State). Based on the American Foreign Assistance Act of April 3, 1948, the United States entered into bilateral agreements with 16 European countries on the terms of assistance to restore their economies after the Second World War. The European Recovery Program operated from April 1948 to December 1951. The total amount of appropriations under the Marshall Plan amounted to about $17 billion, including 2/3 gifts (non-repayable subsidies), 1/3 loans. The main share (60%) was received by Great Britain, Italy, France, and Germany. These sums were used by Western European countries to purchase American goods, which enriched the US monopolies. The terms of assistance under the Marshall Plan primarily reflected the interests of the United States and its desire to prevent economic, political and social instability in European countries. These countries were required to submit an application plan for approval by the American administration, reduce customs duties on trade with the United States, not export certain goods to the USSR and Eastern European countries, provide the United States with information upon their request, and give American citizens equal rights in European business. Proceeds from the sale of American goods received under the Marshall Plan were credited to special bank accounts in the name of the specially created Economic Cooperation Administration (since November 1, 1951, it was replaced by the Mutual Security Agency). These amounts could only be used to purchase American goods.

The Marshall Plan helped strengthen the economy of Western Europe and prepared the conditions for the creation of NATO in accordance with US calculations.

Many post-war international loans had a clearly military-strategic character. In the face of confrontation between the two systems, the United States used its loans to form military blocs, suppress the national liberation movement, and support reactionary regimes in other countries. Since the 50s, the United States has lost its monopoly position in the field of international credit, as Western European countries have turned from debtors into creditors. The emergence of three world centers has intensified competition in the field of international credit.

To compare the terms of various loans, the indicator is used grant element(preferential element, subsidies), which shows how much loan repayment the borrower saves as a result of receiving a loan on more favorable terms than market ones. The grant element for private international loans is much lower (3.2-4.5%) than for official development assistance (ODA) (76.2-80%).

There are indicators of a simple and weighted element of subsidies, which are calculated using the following formulas.

Simple subsidy element

Es = % p - % f,

where Es is the subsidy element;

%р - market interest rate;

%f - actual subsidized interest rate.

Weighted subsidy element

where E.v. - weighted subsidy element;

SK - loan amount (limit);

Tsr - average loan term:

Es is the subsidy element (the difference between market and actual interest rates).

An important characteristic of international credit is its security.

Alternative types of credit collateral include:

Opening target savings accounts;

Pledge of assets;

Assignment of rights under contracts, etc.

When determining the monetary and financial conditions of an international loan, the creditor proceeds from creditworthiness- the borrower's ability to obtain a loan - and solvency- the borrower’s ability to pay its obligations in a timely and complete manner. Therefore, one of the conditions for an international loan is protection against credit, currency and other risks.

Thus, the monetary and financial conditions of international credit depend on the state of the economy, national and world markets for loan capital.

When people talk about interest rates, they usually mean real interest rates as opposed to nominal interest rates. However, actual rates cannot be directly observed. When concluding a loan agreement or viewing financial bulletins, we receive information primarily about nominal interest rates.

The nominal interest rate is interest in monetary terms.

For example, if a $1,000 annual loan pays $120 in interest, the nominal interest rate would be 12% per annum.

Having received an income of $120 on a loan, will the lender become richer? It depends on how prices have changed during the year. If prices rose by 8%, then the lender's real income increased by only 4% (12%-8%=4%).

The real interest rate is the increase in real wealth, expressed as an increase in the purchasing power of the investor or lender, or the exchange rate at which today's goods and services, real goods, are exchanged for future goods and services. Essentially, the real interest rate is the nominal rate adjusted for price changes.

The above definitions enable us to consider the relationship between nominal and real interest rates and inflation.

It can be expressed by the formula

i = r + r,(1.1)

Where i- nominal interest rate;

r- real interest rate;

R- inflation rate.

This equation shows that the nominal interest rate can change for two reasons: due to changes in the real interest rate and (or) due to changes in the inflation rate.

Real interest rates change very slowly over time because changes in nominal interest rates are caused by changes in the inflation rate.

A 1% increase in the inflation rate causes a 1% increase in the nominal rate.

When the borrower and lender agree on a nominal rate, they do not know what rate inflation will take at the end of the contract. They are based on expected inflation rates. The equation becomes:

i = r + r e . (1.2)

This equation is known as the Fisher equation, or the Fisher effect. Its essence is that the nominal interest rate is determined not by the actual inflation rate, since it is not yet known, but by the expected inflation rate ( R e).

The dynamics of the nominal interest rate follows the movement of the expected inflation rate.

Since it is impossible to accurately determine the future rate of inflation, rates are adjusted according to the actual level of inflation. Expectations match current experience.

If the inflation rate changes in the future, there will be deviations in the actual rate from the expected rate.

These are called the inflation surprise rate and can be expressed as the difference between the future actual rate and the expected inflation rate ( r - r e).

If the unexpected inflation rate is zero ( p = p"), then neither the lender nor the borrower loses or gains anything from inflation.

If unexpected inflation occurs ( r - r" > 0 ), then borrowers benefit at the expense of lenders, since they repay the loan with depreciated money.

In case of unexpected deflation, the situation will be reversed: the lender will benefit at the expense of the borrower.

From the above, three important points can be highlighted: 1) nominal interest rates include a markup or premium on expected inflation; 2) due to unforeseen inflation, this premium may turn out to be insufficient; 3) as a result, there will be an effect of redistribution of income between lenders and borrowers.

This problem can be looked at from the other side - from the point of view of real interest rates. In this regard, two new concepts arise:

• - expected real interest rate - the real interest rate that the borrower and lender expect when granting a loan. It is determined by the expected inflation rate ( r = i - r e);
• - actual real interest rate. It is determined by the actual inflation rate ( r = i - r).

Since the lender expects to earn income, the nominal interest rate on new borrowings must be at a level that will provide good prospects for real income consistent with current estimates of future inflation.

Deviations of the actual real rate from the expected one will depend on the accuracy of the forecast of future inflation rates.

At the same time, along with the accuracy of forecasts, there is difficulty in measuring the real rate. It consists of measuring inflation and choosing a price index. In this matter, one must proceed from how the funds received will ultimately be used. If loan proceeds are intended to finance future consumption, then the appropriate measure of income is the consumer price index. If a company needs to estimate the real cost of borrowed funds to finance working capital, then the wholesale price index will be adequate.

When the rate of inflation exceeds the rate of increase in the nominal rate, the real interest rate will be negative (less than zero). Although nominal rates typically rise when inflation rises, real interest rates have been known to fall below zero.

Negative real rates are holding back lending. At the same time, they encourage borrowing because the borrower gains what the lender loses.

Under what conditions and why does a negative real rate exist in financial markets? Negative real rates may be established for some time:

• - during periods of runaway inflation or hyperinflation, lenders provide loans even if real rates are negative, since receiving some nominal income is better than holding cash;
• - during an economic downturn, when demand for loans falls and nominal interest rates decrease;
• - at high inflation, to provide income to creditors. Borrowers won't be able to borrow at such high rates, especially if they expect inflation to slow soon. At the same time, rates on long-term loans may be lower than the inflation rate, since financial markets will expect a fall in short-term rates;
• - if inflation is not sustainable. Under the gold standard, the actual rate of inflation may be higher than expected, and nominal interest rates will not be high enough: “inflation takes merchants by surprise.”

Positive real interest rates mean higher income for lenders. However, if interest rates rise or fall in line with inflation, then the lender suffers a potential capital gain loss. This happens in the following cases:

• 1) inflation reduces the real cost of a loan (loan received). A homeowner who takes out a mortgage loan will find that the amount of debt they owe decreases in real terms. If the market value of his home rises but the face value of his mortgage remains the same, the homeowner benefits from the decreasing real real value of his debt. The lender will suffer a capital loss;
• 2) the market value of securities, such as government bonds, falls if the market nominal interest rate rises, and, conversely, rises if the interest rate falls.

It is customary to evaluate the interest rate in two projections: nominal and real values.

The essence of the nominal rate

Based on the definition of this concept, it is clear that the nominal interest rate does not take into account changes in price growth and other financial risks. The nominal rate can be taken into account by market participants only as an indicative value.

Mathematical effect of the nominal rate

Real rate + Expected inflation rate = Nominal rate

What matters when setting a market rate is the future rate of inflation, taking into account the maturity of the debt claim, and not the actual rate that was in the past.

Equality between the nominal and real rates is possible only in the complete absence of deflation or inflation. This state of affairs is practically unrealistic and is considered in science only in the form of ideal conditions for the functioning of the capital market.

Nominal compound interest rate

In order to correctly assess the expected income from the use of financial resources over a long period of time, economists advise taking into account the compound interest scheme. When calculating profit using the compound interest method, at the beginning of each new standard period, profit is calculated on the amount received based on the results of the previous period.

Any market mechanism in a changing environment, especially such as the domestic economy, is always associated with high risks. Be it a loan agreement or investing in securities, opening a new business or depository cooperation with a bank. When always assessing potential profit, you need to pay attention to external factors and the real state of the market. Based only on nominal profitability, you can make an incorrect, obviously unprofitable, or even potentially disastrous financial decision.