ZIRP

Zero Interest Rate Policy (ZIRP) is a monetary policy stance in which a central bank sets its policy rate at or near zero, with the aim of stimulating aggregate demand and guiding inflation toward a target when conventional rate cuts are exhausted. By keeping very low policy rates, borrowing costs for households and firms decline, supporting consumption, investment, and economic activity.

In practice, ZIRP is often accompanied by other unconventional measures such as asset purchases (quantitative easing) and forward guidance about the future path of policy rates. These tools seek to lower longer-term interest rates, improve liquidity in financial markets, and reassure investors that the central bank will maintain accommodation for an extended period. ZIRP is typically considered most effective if credit channels function and if inflation can be steered toward the target.

History and usage: ZIRP first became prominent in Japan during the 1990s as a response to prolonged stagnation after an asset price collapse. After the 2007–2009 financial crisis, the United States and many other advanced economies adopted near-zero rates for several years. The European Central Bank and other policymakers also pursued prolonged periods of very low or near-zero rates, with some jurisdictions moving into negative rates in later years as part of broader accommodation.

Effects and critique: Benefits include lower borrowing costs, support for spending and investment, and help in raising inflation toward target. Downsides can include diminished returns at the zero lower bound, potential misallocation of resources, boosted asset prices, adverse effects on savers and bank profitability, and difficulties in policy normalization. Some economists warn of liquidity traps if confidence and balance sheets do not improve.

Exit and normalization: When growth and inflation strengthen, central banks may gradually tighten policy, reduce asset purchases, and begin to raise rates, accompanied by clear communication to minimize market disruption.