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. Negative Interest Rate Environment

    A negative interest rate environment exists when a central bank ...
  2. Negative Interest Rate

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

    Monetary policy is the actions of a central bank, currency board ...
  6. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes ...
Related Articles
  1. Personal Finance

    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.
  2. Insights

    Not Crazy: Unconventional Monetary Policy

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

    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.
  4. Personal Finance

    What Does a Central Bank Do?

    A central bank oversees a nation’s monetary system.
  5. Investing

    Interest Rates Explained: Nominal, Real, Effective

    Interest rates are divided into subcategories. Smart investors look beyond the nominal or coupon rate of a bond or loan to see if it fits their objectives.
  6. Trading

    Why Negative Interest Rates Are Not Working

    Find out why negative interest rate policies are failing because bond buyers do not want a negative yield and saturated borrowers want to pay off debts.
  7. Investing

    Get To Know The Major Central Banks

    The policies of these banks affect the currency market like nothing else. See what makes them tick.
  8. Insights

    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. Insights

    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. Insights

    How Monetary Policy Affects Your Investments

    Monetary policy changes can have a significant impact on every asset class. investors can position their portfolios to benefit from policy changes and boost returns by being aware of the nuances ...
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. 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 >>
  4. Can real interest rates be negative?

    Discover the circumstances that can cause real interest rates to be negative and learn how to calculate the values of real ... Read Answer >>
  5. How do nominal interest rates in finance differ from the nominal rate of interest ...

    Read about the subtle difference between a financial instrument's nominal interest rate of return and the general nominal ... Read Answer >>
  6. How can central banks use open market operations to manipulate short-term interest ...

    Discover how central banks use open market operations to manipulate short-term rates. Short-term rates are key inputs into ... Read Answer >>
Hot Definitions
  1. Dumping

    In international trade, the export by a country or company of a product at a price that is lower in the foreign market than ...
  2. Tender Offer

    An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the ...
  3. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  4. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  5. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center