Nominal interest rate

In finance and economics, the nominal interest rate or nominal rate of interest is either of two distinct things:

The concept of real interest rate is useful to account for the impact of inflation. In the case of a loan, it is this real interest that the lender effectively receives. For example, if the lender is receiving 8 percent from a loan and the inflation rate is also 8 percent, then the (effective) real rate of interest is zero: despite the increased nominal amount of currency received, the lender would have no monetary value benefit from such a loan because each unit of currency would get devaluated due to inflation by the same factor as the nominal amount gets increased.

The relationship between the real interest value ${\displaystyle r}$, the nominal interest rate value ${\displaystyle R}$, and the inflation rate value ${\displaystyle i}$ is given by

In this analysis, the nominal rate is the stated rate, and the real interest rate is the interest after the expected losses due to inflation. Since the future inflation rate can only be estimated, the ex ante and ex post (before and after the fact) real interest rates may be different; the premium paid to actual inflation may be higher or lower. In contrast, the nominal interest rate is always known in advance.

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