Central banks around the world use a variety of monetary policy tools to manage the money supply, inflation, and economic growth.
One such tool is PIRP, or “Positive Interest Rate Policy”.
Positive interest rate policy (PIRP) refers to a central bank setting target interest rates above zero percent.
This is in contrast to a zero or negative interest rate policy (ZIRP or NIRP).
What is PIRP?
Under positive interest rate policy, a central bank’s key policy rate such as the federal funds rate in the U.S. is set above 0%.
This gives the central bank more flexibility in using interest rates to manage inflation and growth.
As a result, commercial banks tend to increase the interest rates they charge their customers on loans and other forms of credit.
Higher interest rates can make borrowing more expensive, which can discourage spending and investment and help to reduce inflation.
Potential Effects of PIRP
Positive rates are considered “normal” monetary policy that has been used for decades. They allow central banks to cut or raise rates to respond to changing economic conditions.
PIPRs are typically used during periods of high inflation, when the central bank is seeking to reduce the money supply and cool down the economy.
Also, with rates above zero, savers can earn some interest income, while borrowers pay interest on loans. This helps allocate capital efficiently.
However, PIRPs can also have negative effects on economic growth, as higher borrowing costs can discourage investment and spending by businesses and consumers.
One potential effect of PIRP is that it can lead to a slower rate of economic growth.
When borrowing costs are higher. it makes it more expensive to borrow money.
Businesses and consumers may be less likely to take out loans for investment and spending, which can slow down economic growth and demand in the economy.
This can lead to lower levels of employment and income growth, as well as reduced consumer and business confidence.
Another potential effect of PIRP is that it can lead to a decrease in asset prices.
When borrowing costs are higher, it can become more difficult for individuals and businesses to finance purchases of assets such as real estate or stocks.
This can lead to lower demand for those assets, which can in turn lead to a decrease in their prices.
PIRP vs. ZIRP and NIRP
ZIRP and NIRP refer to monetary policies with 0% and negative target rates.
The aim is typically to stimulate economic activity and spur inflation by reducing borrowing costs for households and businesses.
With very low or negative rates, savers earn little to no interest, while some borrowers may effectively be paid to take out loans.
The effectiveness and side effects of zero and negative rates are controversial, so they tend to only be used temporarily in extreme circumstances.
PIRP is a contractionary monetary policy used by central banks to control inflation, strengthen the currency, and slow down economic growth.
The opposite policy, which is considered an expansionary monetary policy, is a zero or negative interest rate policy where interest rates are decreased to stimulate growth.
Summary
PIRP is a monetary policy tool used by central banks to control inflation and economic growth.
By setting a positive interest rate target, central banks can help to reduce the amount of money available for spending and investing, which can help to control inflation.
However, PIRPs can also have negative effects on economic growth, as higher borrowing costs can discourage investment and spending by businesses and consumers.