Zero-Bound Interest Rate

DEFINITION of 'Zero-Bound Interest Rate'

The lowest percentage of owed principal that a central bank can set. In monetary policy, the use of a 0% nominal interest rate means that the central bank can no longer reduce the interest rate to encourage economic growth. As the interest rate approaches the zero bound, the effectiveness of monetary policy is reduced as a macroeconomic tool. A zero-bound interest rate typically refers to the process where, by gradual steps, the interest rate approaches zero.

BREAKING DOWN 'Zero-Bound Interest Rate'

For much of the 1990s, the interest rate set by the Japanese central bank, the Bank of Japan, hovered near the zero bound. This was done in order to encourage inflation and reduce the threat of deflation, since banks typically increase interest rates to slow growth down. Zero-bound interest rate policies follow periods of major economic pullback.

RELATED TERMS
  1. Zero-Bound

    A situation that occurs when the Federal Reserve has lowered ...
  2. Negative Interest Rate Environment

    A negative interest rate environment exists when a central bank ...
  3. Low Interest Rate Environment

    A low interest rate environment is when the risk-free rate of ...
  4. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  5. Negative Interest Rate

    Negative interest rates refer to the case when cash deposits ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
Related Articles
  1. Economics

    How Unconventional Monetary Policy Works

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
  2. Investing News

    How Interest Rates Can Go Negative

    Central banks from Europe to Japan have implemented a negative interest rate policy (NIRP) in order to stimulate economic growth.
  3. Investing News

    3 Times Negative Yields Were Instituted This Century

    Discover why several major global banks decided to test the radical economic policy of negative interest rates and the implications of those actions.
  4. Economics

    Fiscal Vs. Monetary Policy Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy and fiscal policy.
  5. Economics

    What is Zero Interest-Rate Policy (ZIRP)?

    In the years following the financial crisis, several central banks have turned to zero interest-rate policy to aid economic recovery.
  6. Economics

    What Does a Central Bank Do?

    A central bank oversees a nation’s monetary system.
  7. Economics

    Understanding Interest Rates: Nominal, Real And Effective

    Interest rates can be broken down into several subcategories that incorporate various factors such as inflation. Smart investors know to look beyond the nominal or coupon rate of a bond or loan ...
  8. Economics

    Negative Interest Rate Policy (NIRP)

    A negative interest rate policy is an unconventional monetary policy tool in which nominal target interest rates are set below zero.
  9. Economics

    10 Countries With Lower Interest Rates Than the US

    Learn about the 10 countries with lower interest rates than the United States and how interest rates indicate a country's economic outlook.
  10. Investing News

    Why Positive Economic Data Pushes the Market Down

    Unemployment comes in higher than analysts’ expectations, and the market rallies 1% instead of dropping. GDP growth exceeds expectations slightly, and markets drop. Why could this be happening?
RELATED FAQS
  1. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest ... Read Answer >>
  2. What is the difference between real and nominal interest rates?

    Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ... Read Answer >>
  3. Do lower interest rates increase investment spending?

    Learn how the Federal Reserve Board uses monetary policy and the federal funds rate to influence long-term interest rates ... Read Answer >>
  4. How were nominal interest rates in the economy set before the Federal Reserve?

    Learn more about how nominal interest rates are determined, how the Federal Reserve targets them, and how they acted prior ... Read Answer >>
  5. How is the Macaulay duration related to fixed income markets?

    Determine how monetary policy influences the Fisher effect. The Fisher effect is used to determine real interest rates which ... Read Answer >>
  6. What are some examples of operations management in healthcare?

    Learn how open market operations and monetary policy are related. Since the Great Recession, open market operations have ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center