Nominal interest rate refers to the interest rate before taking inflation into account. It is often used by financial institutions and banks to determine the interest charged by or to other parties (e.g. customers, other institutions...).
Central banks set short-term nominal interest rates, which 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, which encourage consumers to take out loans and spend money. Owing to zero lower bound, the nominal interest rate cannot be set below 0.
The famous Fisher equation captures the relationship between nominal and real interest rate under inflation:
Real interest rate = Nominal interest rate - Inflation rate
For example, if funds used to purchase a certificate of deposit (CD) are set to earn 4% in interest per year and the rate of inflation for the same time period is 3% per year, the real interest rate received on the investment is 4% - 3% = 1%. The real value of the funds deposited in the CD will only increase by 1% per year, when purchasing power is taken into consideration.