Positive Interest Rate Policy (PIRP)

Central banks around the world use different tools to influence the money supply, control inflation, and guide economic growth. One of these tools is called Positive Interest Rate Policy , or PIRP .

Unlike Zero Interest Rate Policy (ZIRP) or Negative Interest Rate Policy (NIRP) , where rates are at or below zero, PIRP means that the central bank sets its main interest rate above zero percent . For example, in the U.S., this would be the federal funds rate — the rate banks charge each other for short-term loans.

When a central bank uses PIRP, it gives itself more room to adjust rates up or down depending on the economy’s needs. Under this policy, commercial banks usually raise the rates they charge consumers and businesses for things like mortgages, car loans, and business credit. As borrowing becomes more expensive, people and companies tend to spend and invest less — which helps slow inflation.

Why Is PIRP Considered “Normal”?

PIRP is often seen as the standard or traditional approach to monetary policy. For many decades, central banks have used positive interest rates to manage economic cycles. It allows them to cut rates when the economy slows and raise them when it heats up too fast.

During times of high inflation, central banks often turn to PIRP to reduce the amount of money flowing through the economy. Higher rates make saving more attractive than spending, and borrowing more costly than investing. This helps bring inflation under control and encourages more efficient use of capital.

The Downside of Positive Rates

While PIRP is effective at managing inflation, it can also slow down economic growth. When loans become more expensive, both individuals and businesses may hesitate to borrow. This can lead to:

• Less investment by companies
• Reduced consumer spending
• Slower job creation
• Lower income growth
• Weaker confidence in the economy

Another side effect of higher interest rates is that they can cause asset prices — like real estate or stock values — to drop. If financing becomes harder to get, fewer people and businesses are able to buy assets, which lowers demand and can push prices down.

How Does PIRP Compare to ZIRP and NIRP?

In contrast to PIRP, ZIRP keeps rates near 0%, while NIRP goes even further by setting rates below zero . These policies are typically used during severe economic downturns to encourage borrowing, spending, and investment by making credit extremely cheap.

Under ZIRP or NIRP, savers earn little or no return on deposits, and in some cases, borrowers might actually be paid to take out loans. While these approaches can stimulate activity, their long-term effects are debated, so they’re usually only used in extreme situations.

So What Kind of Policy Is PIRP?

PIRP is considered a contractionary monetary policy — meaning it's used to slow things down. Its main goals are to:

• Curb inflation
• Support currency strength
• Prevent the economy from overheating

The opposite — an expansionary policy — involves cutting rates to near or below zero to boost growth when the economy is weak.

In Summary

PIRP is a key tool central banks use to keep inflation in check and stabilize the economy. By setting interest rates above zero, they can reduce excessive spending and borrowing, helping to cool inflationary pressures.

However, there’s a trade-off: while PIRP supports price stability, it can also slow economic growth. Higher borrowing costs may discourage investment and consumer spending, which are essential drivers of economic activity.

Understanding how and why central banks choose between PIRP, ZIRP, and NIRP helps explain broader economic trends — from mortgage rates to job growth and beyond.