The real interest rate is the InterestInterestThe price a borrower pays to borrow money, and what a saver earns for lending it. Usually given as a percentage per year. rate after InflationInflationA general rise in prices over time, which means each króna buys less than before. has been taken off. The rate a bank advertises is the nominal interest rate. It tells you how much the number of krónur grows. The real rate tells you whether those krónur buy more at the end of the year than at the start.
An example
You have ISK 1,000,000 in an account paying 7% nominal interest, and inflation is 5%.
- After a year you have ISK 1,070,000.
- A basket of goods that cost ISK 1,000,000 now costs ISK 1,050,000.
- The real interest rate is therefore about 2%. You can buy about 2% more than before, or 1.9% if you calculate it precisely.
If inflation were 8%, the real rate would be negative. You would have more krónur, but they would buy less.
Tax makes it worse
Capital income tax is charged on the nominal interest, not the real interest. If your interest income is above the tax-free allowance of ISK 300,000 a year, 22% of it goes in tax. From 7% nominal interest, 5.46% is then left, and with 5% inflation the real rate after tax is only about 0.4%.
Real interest in Iceland
Real interest has long been a hot topic in Iceland. During the high-inflation years of the 1970s, real rates were often deeply negative. Savings melted away, and borrowers gained at savers' expense. General IndexationIndexationWhen the principal of a loan or deposit follows the consumer price index. Indexation protects savings from inflation but makes debts rise with prices. of financial obligations, introduced in 1979, was meant partly to correct this. Rates on index-linked loans and deposits are in effect real rates, because the inflation adjustment is added to the principal.
The Central Bank also looks at real rates when it sets the policy ratePolicy rateThe Central Bank's interest rate that other rates in Iceland follow. The bank calls it its key rate and moves it to keep inflation in check.. High real rates slow the economy and bring inflation down, while low real rates stimulate it.
Real interest and crypto
Many people who buy bitcoin give negative real interest rates as a reason. When savings in a bank account lose real value, people look for other ways to preserve it. Bitcoin pays no interest, though, and its price swings a lot in the short run. Many people therefore treat it as a long-term holding, alongside an emergency fund in the bank rather than instead of one.
Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 2 November 2026.