How does the inflation outlook affect the nominal rate of interest?

Nominal Rate of Return or Interest

The nominal rate is the reported percentage rate without taking inflation into account. It can refer to interest earned, capital gains returns, or economic measures like GDP (Gross Domestic Product). If your Savings rate pays1.5% per  year that’s the nominal rate. On a $1,000 investment, you will receive $15 in interest after one year.

Real Rate of Return or Interest

The trouble with nominal rates is that what you see isn’t necessarily what you get. The real rate takes inflation into account, and it’s easy to calculate:

Real Rate = Nominal Rate – Inflation Rate

So if your Savings A/c is earning1.5% and inflation is running at2.0%, your real rate of return looks like this:

Real Rate =1.5% –2.0% = -0.5%

Your real rate of return is actually negative. That’s because inflation erodes the purchasing power of your money.

 

 

Nominal Rate of interest is = Real Interest Rate + Expected Inflanation rate.

It is to be noted that nominal interest rate is arrived at after factoring expected inflaction and not present inflation rate to real interest rate.

inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which prices for goods and services rises. In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to have less money to spend. With less spending, the economy slows and inflation decreases.

Inflation is one of the main factors that determine the level of interest rates. For this reason, any economic data or financial information that will affect interest rates or inflation will be of great importance to the merchants because they will provide new opportunities for trading when the market re-evaluate himself. Higher inflation increases the cost of the interest rates on long-term and that it affects the interest rates and brought which reduces orientation to borrow. Therefore, people stopped buying (ie, lack of demand) increases the products offered and therefore less production and this leads to increased unemployment. Or the so-called recession Example: if inflation rose, the cost of goods and services increases, which makes the cost of buying a much larger and this will affect the savings of people and lack of investment in return for increased spending or building homes that could adversely affect the business in the community.

All colleagues gave an excellent answers. Theres nothing for me to add.

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.

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 Inflation-Protected 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 three-year deposit is4% and the inflation rate over this period is3%, the investor’s real rate of return would be1%. 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 of3% inflation, the investor’s purchasing power would erode by1% per annum.

Central banks set short-term 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 near-term 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.

nominal rate of interest minus inflation is real interest rate.

so, if the inflation is zero the nominal rate of interest = real interest rate

      if inflation = nominal rate of interest then real rate of interest is zero.

 

The relationship between inflation and nominal interest rates can be described in the equation:

where r is the real interest rate, i is the inflation rate, and R is the nominal interest rate

What I know about inflation that its : a rise in the prices of goods and services, at  the same time , there is a decline in real per capita income, so inflation is one of  the biggest economic problems, so some countries that suffer from this problem,is working to raise  the salaries of the people, due to the increase in the prices of goods, but  people did not know the truth, because the rate of increase in prices of goods and services, exceeding the rate of increase in salaries

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.

Nominal interest seems bloated.

Sorry Sara, I cannot give answer to this question, this is not the field of my interactions and also not want to give  copy paste answers as doing so will depreciate my knowledge and your dignity. 

Regards

Arinjay