Zero Interest Rate Policy (ZIRP)

ZIRP , short for Zero Interest Rate Policy , is a term used in economics to describe when a country’s central bank sets its key interest rates at or near zero. It’s considered an unconventional monetary policy tool and is typically used during times of economic weakness.

The main goal of ZIRP is to boost economic activity by making borrowing cheaper. When interest rates are extremely low, businesses and individuals can access credit more easily, which encourages spending, investment, and overall economic growth.

Under ZIRP, the central bank effectively stops lowering interest rates because it has hit what’s known as the zero lower bound — the point at which nominal interest rates can’t go any lower. At this stage, traditional monetary policy tools lose much of their power to stimulate the economy.

ZIRP often goes hand-in-hand with something called a liquidity trap , which happens when very low interest rates fail to encourage lending or spending because people and businesses prefer to save rather than invest. In this environment, even though money is cheap to borrow, it doesn’t necessarily lead to increased economic activity.

The idea behind ZIRP is similar to that of lowering interest rates in general: to fight deflation, discourage saving cash, and promote borrowing and spending. However, once ZIRP is in place, central banks have limited room to respond to further economic downturns.

Many see the adoption of ZIRP as a sign that a central bank has “run out of bullets” — meaning it has exhausted its primary tools for managing the economy. In some cases, ZIRP has even evolved into NIRP (Negative Interest Rate Policy) , where depositors are actually charged to keep money in the bank.

A major example of ZIRP occurred on December 16, 2008 , during the global financial crisis. Then-Federal Reserve Chair Ben Bernanke announced that the U.S. central bank was cutting its benchmark interest rate to nearly zero — the first time in U.S. history that the Fed had taken such a step.

The Fed kept rates near zero for about seven years, finally beginning to raise them in 2015 as the economy showed signs of recovery. By 2019 , short-term interest rates had climbed back up to around 2.5% .

But then came the COVID-19 pandemic , and all of that progress was quickly reversed. The U.S. once again adopted ZIRP as a protective measure, aiming to cushion the economy from the financial impact of the global health crisis.