What Is Zero-Bound?

Zero-bound is an expansionary monetary policy tool where a 澳洲幸运5官方开奖结果体彩网:central bank lowers short-term interest rates to zero, if needed, to stimulate the economy. A central bank that is forced to enact this policy must also pursue other, often unconventional, methods of stimulus to resuscitate the🌄 economy.

Understanding Zero-Bound

Zero-bound refers to the lowest level that 澳洲幸运5官方开奖结果体彩网:interest rates can fall to, and log﷽ic dictates that zero would be that level. The main arrow in a central bank's monetary policy quiver is interest rates. The bank will manipulate interest rates to either stimulate a stagnating economy or dampen an overheating one. Clearly, there are limits, especially at the lower end of the range.

The zero-bound is the lower limit that rates can be cut to, but no further. When this level is reached, and the economy is still underperforming, then the central bank can no longer provide stimulus via interest rates. Economists use the term 澳洲幸运5官方开奖结果体彩网:liquidity trap to describe this scenario.

When faced with a liquidity trap, alternative procedures for monetary stimulus often become necessary. Conventional wisdom was that interest rates could not move into negative territory, meaning once interest rates reach zero or are close to zero, for example, 0.01%, 澳洲幸运5官方开奖结果体彩网:monetary policy has to be altered to co🤡ntinue to stab♋ilize or stimulate the economy.

The most familiar alternative monetary policy tool is perhaps 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE). This is where a central bank engages in a large-scale asset-buying program, often involving treasuries and other 澳洲幸运5官方开奖结果体彩网:government bonds. Not only will this keep short-term rates low, but it will push down longer-term rates, which further incentivizes borrowing.

Negative Rates

Since the 澳洲幸运5官方开奖结果体彩网:Great Recession of 2008 and 2009, some central banks pushed the limits of zero-bound below the numerical level and implemented 澳洲幸运5官方开奖结果体彩网:negative rates. As the global economy plummeted, central banks slash🦂ed rates to spur growth and spending. However, as the recovery remained slow, central banks began entering the uncharted territory of negative rates. 

Sweden was the first country to enter this territory, when in 2009 the Riksbank cut the 澳洲幸运5官方开奖结果体彩网:repo rate to 0.25%, which pushed the deposit rate to -0.25%. Since then, the 澳洲幸运5官方开奖结果体彩网:European Central Bank (ECB), the 澳洲幸运5官方开奖结果体彩网:Bank of Japan (BOJ), and a handful of others followed suit at 😼one time or another. 

There are instances where negative rates have been implemented during normal times. Switzerland is one such example; through much of the 2010s, its 澳洲幸运5官方开奖结果体彩网:target interest rate was-0.75%, which was raised to -0.50% in 2021. Japan similarly had adopted a 澳洲幸运5官方开奖结果体彩网:negative interest rate policy (NIRP), with a target rate of -0.1%.

Example of 😼Zero-Bound and Negative Interest Rates in Switzer🐠land

The 澳洲幸运5官方开奖结果体彩网:Swiss National Bank (SNB) maintains a negative interest-rate policy. While there are other examples of negative interest rates, the Swiss example is rather unique in that the country is opting to keep rates very low (and negative) to prevent its currency from rising too significantly.

Switzerland is viewed as a safe-haven, with low political and 澳洲幸运5官方开奖结果体彩网:inflation risk. Other examples of negative and zero-bound interest rate policies have often come about because of economic turmoil,🍸 which requires cutting interest rates to stimulate the economy. The Swiss situation doesn't fit thi🌸s scenario.

The SNB has maintained that it must keep rates low to prevent its already relatively high currency value from going even higher. A rising currency hurts the Swiss export industry. Therefore, the SNB has taken a two-pronged approach to control the currency. The Bank has actively engaged in currency market interventions to help cap the strong 澳洲幸运5官方开奖结果体彩网:Swiss franc, and als🏅o keeps interest rates low ꧙or negative to dissuade strong speculative buying of the franc.

In this situation, the SNB will eventually adopt a zero-bound strategy for moving back to 0% and above. However, that won't happen until the central bank feels it can raise rates without causing too significant of a rise in the currency.