Could ?Helicopter Money? Propel Pound Sterling Euro GBP EUR Exchange Rate Skywards?

March 24, 2016 - Written by James Fuller

STORY LINK Could ?Helicopter Money? Propel Pound Sterling Euro GBP EUR Exchange Rate Skywards?

After Draghi Hints at No More QE Expansion, How Will the Central Bank Combat Deflation?

Part of the reason for the dramatic shift out of risk which marked the first few weeks of 2016 was the generalised belief from investors that Western central banks had fired all their bullets in the ongoing battle against deflation.

Mario Dragi’s hint earlier this month that there would be no further extension to the European Central Bank’s controversial Quantitative Easing programme, which now stands at €80bn per month, added to the impression that the world’s reserve banks are now merely passive observers of falling prices.

However, some analysts are not so sure – they point to a little-discussed policy named ‘Helicopter Money’ as a potential solution to the tricky phenomenon of deflation.

The policy was first proposed by Noble Prize winning economist Milton Friedman and involves governments selling short-dated debt directly to their central bank. The cash which this generates is then used to fund tax cuts and large scale spending programmes.

Will the ECB Be the First Major Central Bank to Adopt Helicopter Money?

Erstwhile US Federal Reserve Chair Ben Bernanke was identified as an advocate of this highly controversial policy when he stated in a 2002 speech that ‘Helicopter Money’ would ‘almost certainly be an effective stimulant to consumption and hence to prices’. Analysts have been queueing up to suggest that, with global inflation at or close to zero per cent, ‘helicopter money’ could become a near-term policy option.

Ewen Cameron-Watt of BlackRock stated yesterday that although it’s a ‘possible’, he doesn’t believe that, ‘helicopter money gets rolled out quite yet’. He went on to assert that, ‘you need a considerable downturn and further decline in inflation expectations first.’ Meanwhile, Stephen King of HSBC was more go-ahead, observing that, ‘the helicopter option is simple, easily implemented and, for some, offers the closest thing to a free lunch.’

The European Central Bank is considered the most likely early adopter of a Helicopter Money scheme, after Mario Draghi described it as an ‘interesting’ concept. If the ECB did go down this route, then FX insiders forecast a sharp rise in the Pound Sterling euro exchange rate GBP EUR.

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TAGS: Euro Forecasts Pound Euro Forecasts Pound Sterling Forecasts