Effective lower bound (interest rates)
The effective lower bound (ELB) is a term associated with the handling of monetary policy by a nation's central bank. ELB refers to the point at which further cuts in the main monetary policy interest rate no longer provide stimulus to aggregate demand and GDP or at which adverse effects, such as in the financial sector, can arise. The equilibrium interest rate is the interest rate at which monetary policy is neither expansionary nor contractionary for a nation's economy. For many countries in recent years and especially in the aftermath of the 2007-2010 Global Financial crisis, policy interest rates have been set well below the equilibrium interest rate to provide support to demand, output and jobs and reduce the risks of deflation. Some central banks (including Denmark, Sweden and Switzerland) have cut their policy interest rates below zero - i.e. they have moved to negative interest rates. The UK Bank of England's latest analysis suggests that negative interest rates would not be an effective way of stimulating demand during a downturn so they prefer to keep their own monetary policy interest rate at a positive level (0.1%) but only just above zero.
13th October 2020