“We have one of the highest interest rates in the world. All we need is nail hole in the bottom of the boat and we’re sunk” – Pauline Hanson (Australian Politician)
Most of us understand nominal rate of interest which is why 10% FD rates and 9% tax free bond rates seemed like a no brainer and attracted us to invest heavily in them during 2010 to 2014. The fact that most people missed was that these rates were still lower than inflation and we were losing value of money by investing at these attractive nominal rates. REAL interest rate (RIR) is the difference between nominal rates and inflation. (REAL interest rate = Nominal interest rate – Inflation). Contrary to nominal rate, REAL interest rate has a bigger impact on value of money and sadly most of us fail to track and understand its significance.
Negative RIR of 2010 where FD rates were lower than Inflation by almost 6% forced everyone to misallocate towards physical assets like real estate and gold to beat inflation.