What is a real interest rate, and how does Bank Rate reach savings and mortgages?

A real interest rate is the interest you get after allowing for inflation. The headline rate, called the nominal rate, is what the bank advertises. The real rate is approximately the nominal rate minus the inflation rate, a relationship named the Fisher equation after the American economist Irving Fisher. If a saver locks in 5% for a year and expects prices to rise 2%, the expected real rate is about 3%.

So a savings rate of 4% in a year when prices rise 4% leaves you with a real rate of zero: more pounds, but the same buying power. A negative real interest rate simply means inflation is greater than the nominal rate. The reverse is true for borrowers: debtors with a fixed nominal rate see the real rate they pay fall as inflation rises.

How does the Bank of England's Bank Rate reach ordinary people? Bank Rate is the interest the Bank pays commercial banks that hold money with it, and the rate it charges on loans to them. It affects their own lending and savings rates: when the Bank raises Bank Rate, banks will usually charge more on loans and offer more on savings. Higher payments on many mortgages and loans leave people less to spend elsewhere, businesses are less able to raise prices, and inflation falls.

Lately the pass-through has been quick. In September 2026 the Bank noted that pass-through to household and business lending rates had been full and fast, with the quoted rate on two-year fixed mortgages around 95 basis points higher than before the conflict in the Middle East began.