A zero-bound interest rate occurs when short-term nominal interest rates reach or approach zero, making it impossible (or extremely difficult) for central banks to stimulate the economy further by cutting rates.
Under these conditions, traditional monetary policy (lowering rates to boost borrowing and spending) loses effectiveness. Central banks often resort to unconventional tools – like quantitative easing, forward guidance, negative rates, or other balance-sheet measures – to provide additional stimulus.
When rates hit the zero bound, economies may risk falling into a liquidity trap, where people hoard cash because they expect little gain from lending or investing, further weakening demand.
