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Inflation, real interest rate and the Fisher equation

Inflation, inflation, inflation and the Fisher equation! Are there winners in an inflationary environment, how?

Effects of inflation are adjusted to reflect the real cost of funds and real yield to the lender or to an investor. Hence, the real interest rate reflects this purchasing power value of interest paid and rate of time-preference of a borrower or lender.

The calculation: Real Interest rate = Nominal Interest Rate - Inflation, where the Nominal Interest Rate can be referenced to our Singapore Interbank Offered Rate (SIBOR) SIBOR rate and Inflation referenced to MAS core inflation rate.

Note: SIBOR will discontinue after 31 December 2024 and transit to Singapore Overnight Rate Average (SORA).

E.g. Real Interest rate = Nominal Interest Rate (SIBOR) - Inflation (MAS core inflation), 0.44 (3m SIBOR, as of March 2021) - 0.5% (March 2021) = -0.06%

Now what does a positive and negative Real Interest Rate mean? It depends on whether you are a lender or a borrower. Borrowers benefit when inflation results in lower real interest rate payable whereas lenders lose out when interest rates for deposit rise at a lower rate than core inflation as deposits will not be attractive. Further, a higher rate of return on interest is required if you are looking to invest.

Hence, a savvy consumer or investor should take this into consideration and make their investments or loan accordingly.

Useful reference: Investopedia, Real vs. Nominal Interest Rate: What's the Difference?