zerointerestrate

Zero-interest rate, or zero-interest-rate policy (ZIRP), is a monetary policy stance in which a central bank sets its policy rate at or near zero in order to stimulate economic activity by lowering borrowing costs and encouraging spending and investment.

ZIRP is most often used during recessions or periods of low inflation when conventional policy space is exhausted. The Bank of Japan began adopting near-zero policy in the late 1990s, and the United States and many other economies maintained near-zero rates around and after the global financial crisis of 2007–2009 and in subsequent years. In addition to rate cuts, central banks commonly employ unconventional measures such as large-scale asset purchases (quantitative easing) and forward guidance about the future path of rates to reinforce stimulus.

Mechanisms: Very low or zero policy rates reduce the cost of borrowing for households and businesses, supporting consumption and investment. They can raise asset prices, influence exchange rates, and shift expectations toward higher inflation or growth. These effects depend on credit availability, balance sheet conditions, and confidence.

Risks and limitations: The policy loses effectiveness when rates are already at or near zero, creating a liquidity trap. Prolonged ZIRP can encourage excessive risk-taking, inflate asset bubbles, and widen wealth and income disparities. Savers and pension funds may face lower returns, and normalization after a long period can be challenging for financial markets and the real economy.

Exit and related policy considerations: Central banks unwind ZIRP by gradually raising rates and reducing asset purchases, using forward guidance to manage expectations. The timing and pace of normalization depend on inflation, growth, and financial stability.

ZIRP remains a debated tool and is typically complemented by other monetary and fiscal measures to support a sustained recovery.