|Date||Real Interest Rate|
Nominal interest rates include a component to compensate lenders for inflationary expectations. The real cost of servicing loans that are set using nominal interest rates falls over time with inflation. If nominal interest rates are 7% and inflationary expectations are 3% this means that real interest rates are about 4%.
Real interest rates should be used:
- In the analysis of long-term projects as either the cost of capital or the opportunity cost of capital.
- In calculating the cost of capital where the asset base is recorded at current costs, i.e. the assets have been revalued over time.
- The real interest rate in the above table has been calculated by taking the LGFA CAD rate (actual or forecast) and deducting an amount for inflation using the ABS All Groups Annual CPI (for actual calculations) or the LGFA forecast of 1.5% in 2020 & 1.5% in 2021 (for forecast calculations).
- The estimated real interest rates are provided as a useful guide for budget deliberations.
- Actual and Forecast Real Interest Rates will be updated in July / August each year.