Definition
The zero lower bound is the point at which a central bank's main policy interest rate has been cut to zero and can no longer be lowered in the normal way to stimulate the economy. It exists because people can always hold physical cash, which earns a nominal return of zero — so they would refuse to lend at deeply negative rates.
When an economy is weak but rates are already at or near zero, the central bank's conventional tool is exhausted, and policy is said to be constrained by the zero lower bound.
Why it matters
How it works
In normal times, a central bank fights a downturn by cutting interest rates, which lowers borrowing costs and encourages spending and investment. Once the rate reaches zero, that channel stalls — further cuts would simply prompt savers to hoard cash.
To regain traction, central banks turn to other measures: buying long-term assets to push down longer-term rates, signaling that rates will stay low for an extended period, or, in some cases, experimenting with modestly negative rates. Because these tools are less reliable, governments often lean on fiscal spending to fill the gap when the zero lower bound binds.