For example, in case of severe financial instability, a reduction in policy rates may have weaker effects than under normal conditions, because increasing risk premia prevent lending rates from falling, or because of credit rationing arising from a general unwillingness on the part of banks to lend.
In the worst case, such a situation may ultimately lead to policy rates hitting the zero lower bound, if the monetary authority’s successive attempts to reduce the cost of credit do not succeed in improving credit market conditions.