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The zero lower bound, or ZLB, describes the point where a central bank has almost no room left to cut interest rates.
Central banks usually lower rates when the economy is weak because cheaper borrowing can support spending and investment. But once the policy rate is already near 0%, another normal rate cut may have very little effect.
For example, reducing a rate from 4% to 2% gives the central bank plenty of room to act. Reducing it from 0.25% to 0% does not.
At the ZLB, central banks may use other tools, such as buying bonds or giving guidance about future rates. The limit is not always exactly zero, since some countries have used slightly negative rates.
