Under ZIRP, the central bank maintains a 0% nominal interest rate.
The ZIRP is an important milestone in monetary policy because the central bank is typically no longer able to reduce nominal interest rates.
What Is Zero Interest-Rate Policy (ZIRP)?
The United States, Japan, and several European Union member nations have turned to unconventional means to stimulate economic activity in the years following the Great Recession. Economists believe aggressive monetary policy is integral to the recovery process after a financial crisis. After two decades of slow growth, the Bank of Japan decided to employ a zero interest rate policy (ZIRP) to combat deflation and promote economic recovery. A similar policy has been implemented by the United States and the United Kingdom.
ZIRP in the U.S.
On Dec. 16, 2008, with the world economy overwhelmed by the Global Financial Crisis, then head of the U.S. Federal Reserve Ben Bernanke announced that the American central bank was lowering its benchmark target interest rate to nearly zero.
The announcement by Bernanke marked the first time in American history that the Fed had dropped interest rates to such a level and became the first time that the U.S. adopted a Zero Interest Rate Policy (ZIRP).
The Fed held rates near zero until 2015 (approximately 7 years) before the central bank finally said the economy was healthy enough to (slowly) start raising rates.
The Fed was able to raise short-term interest rates as high as 2.5% percent (from zero) during the years 2015-2019.
Fast-forward to the present, all that work on raising the interest rate environment back toward “normal” levels have been erased.
As of March 15, 2020, ZIRP officially returned to the U.S. as a defensive tactic aimed at helping to insulate the American economy from negative shocks related to the ongoing global coronavirus crisis.