A currency with the higher nominal interest rate does not necessarily offer the higher return in purchasing-power terms. The comparison depends on which inflation measure is used and when that inflation occurs.
The documented distinction
The ECB distinguishes the agreed nominal interest rate from the real rate after adjusting for inflation. Its explainer presents nominal interest minus inflation as a simple calculation of the real rate. That adjustment asks what the proceeds can buy, rather than how many currency units an account earns. ECB — Nominal and real interest rates
For a one-period investment, an exact purchasing-power calculation is (1 + nominal return) divided by (1 + inflation), minus one. Subtraction is an approximation. The distinction becomes more visible as the rates grow.
A higher headline rate can produce a lower real return
Consider two invented one-year deposits, with no taxes, fees or credit losses. Deposit A earns 5% while prices in its currency rise 4%. Deposit B earns 3% while its domestic price level rises 1%. Their exact real returns are approximately 0.96% and 1.98%, respectively. The nominal ranking and purchasing-power ranking differ.
These are domestic purchasing-power comparisons. An investor converting the proceeds into another currency also faces the exchange rate at conversion. A positive domestic real return can accompany a loss after conversion into the investor’s reporting currency.
There is also a timing problem. Last month’s annual inflation rate describes past price changes. A one-year investment made today depends on inflation over the coming year. Subtracting the historical number from today’s quoted return creates an indicator, but does not establish the investment’s future purchasing power.
For market analysis, distinguish a backward-looking realised real return from an estimate using expected inflation. Neither is a standalone currency forecast. Different assumptions about future inflation can reverse the comparison even when the quoted interest rates are unchanged.
Build a comparable pair
Record the maturity, compounding convention and instrument behind each nominal rate. A policy rate, retail deposit and government-bond yield answer different questions; placing them in the same column does not make them comparable.
Then identify the inflation series, its reference period and whether it is observed or expected. Keep credit risk, conversion costs and currency exposure visible alongside the real-rate calculation. A useful FX briefing explains the comparison’s assumptions before attaching a directional interpretation.