Zero-Interest Policy

A zero-interest policy is a policy used by central banks. When applied by a central bank, a zero-interest policy reduces the interest rates charged by central banks to commercial banks for loans of base money to zero. Zero-interest policies may be used by central banks for a number of different reasons. The primary purpose of zero-interest policies is to enable commercial banks to lend out money at low interest rates in order to fuel economic growth.

Central bank interest rates are an important instrument of financial policy. Commercial banks borrow base money from central banks. They then put this money into circulation by lending it out to businesses and individuals. When a central bank lowers its interest rates, loans become cheaper. Businesses are better able to afford borrowing money, and consumers can access cheap credit which raises consumption of goods and services. Ideally, this results in economic growth. For this reason, central banks typically implement zero-interest policies as a reaction to economic decline or recession.

The advent of the last major international recession in 2008 led the central banks of the United States, the Eurozone and other countries lowered their interest rates to zero. In the past, a 0% interest rate was considered to be the lowest possible interest rate which could be effectively implemented by a central bank. However, in the wake of the 2008 recession, a number of central banks implemented negative interest rates.

The Swiss National Bank (SNB) lowered its interest rate to -0.75% in 2015. In so doing, it went beyond a zero-interest policy and created a negative interest environment. The SNB enacted this policy in order to lower the value of the Swiss franc in relation to the euro and maintain control over the Swiss economy and inflation rates.

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Expert Benjamin Manz
Benjamin Manz is CEO of and an independent expert on banking and finance.