DEFINITION of 'Nominal Interest Rate'
The interest rate before taking inflation into account. The nominal interest rate is the rate quoted in loan and deposit agreements. The equation that links nominal and real interest rates is:
(1 + nominal rate) = (1 + real interest rate) (1 + inflation rate).
It can be approximated as nominal rate = real interest rate + inflation rate.
INVESTOPEDIA EXPLAINS 'Nominal Interest Rate'
To avoid purchasing power erosion through inflation, investors consider the real interest rate, rather than the nominal rate. One way to estimate the real rate of return in the U.S. is to observe the interest rates on Treasury InflationProtected Securities (TIPS). The difference between the yield on a Treasury bond and the yield on TIPS of the same maturity provides an estimate of inflation expectations in the economy.
For example, if the nominal interest rate offered on a threeyear deposit is 4% and the inflation rate over this period is 3%, the investor’s real rate of return would be 1%. While the real rate is low, at least it will preserve the investor’s purchasing power. On the other hand, if the nominal interest rate is, say, 2% in an environment of 3% inflation, the investor’s purchasing power would erode by 1% per annum.
Central banks set shortterm nominal interest rates, which then form the basis for other interest rates charged by banks and financial institutions. Nominal interest rates may be held at artificially low levels after a major recession to stimulate economic activity through low real interest rates. A necessary condition for such stimulus measures is that inflation should not be a present or nearterm threat. Conversely, during inflationary times, central banks may overestimate the inflation level and keep nominal interest rates too high. The resulting elevated level of real interest rates may have serious economic repercussions.
VIDEO

Nominal Rate Of Return
The amount of money generated by an investment before expenses ... 
Nominal GDP
A gross domestic product (GDP) figure that has not been adjusted ... 
Nominal
An unadjusted rate, value or change in value. This type of measure ... 
Real Interest Rate
An interest rate that has been adjusted to remove the effects ... 
Fisher Effect
An economic theory proposed by economist Irving Fisher that describes ... 
Risk Premium
The return in excess of the riskfree rate of return that an ...

What is the relationship between inflation and interest rates?
Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which ...

Investing Basics
How Banks Set Interest Rates On Your Loans
On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest ... 
Economics
The International Fisher Effect: An Introduction
The Fisher models have the ability to illustrate the expected relationship between interest rates, inflation and exchange rates. 
Economics
Forces Behind Interest Rates
Get a deeper understanding of the importance of interest rates and what makes them change. 
Bonds & Fixed Income
Understanding Interest Rates, Inflation And The Bond Market
Get to know the relationships that determine a bond's price and its payout. 
Active Trading
Shield Your Portfolio From Inflation For Real Returns
Inflationprotected securities are part of the equation, but they're not a perfect solution. 
Forex Education
Why Interest Rates Matter For Forex Traders
Central banks' rate changes are one of the biggest influences on the forex market. 
Economics
The Importance Of Inflation And GDP
Learn the underlying theories behind these concepts and what they can mean for your portfolio. 
Investing Basics
How To Prepare For Rising Interest Rates
Get to know the basic, timetested strategies that any investor or trader can use to profit in a rising interest rate environment. 
Economics
What's The Impact On Equities If The Rates Hike?
The Fed is on course for raising interest rates. True, that leaves the question of when (most likely June or September, but could be later) and how much. 
Economics
What is Deflation?
Deflation is an economic term used to describe a period of declining prices for goods and services. Decreases in the money supply, government spending, consumer demand and business investment ...