Could ?Helicopter Money? Theory Send GBP EUR Exchange Rate Lower Still?

Modified: Friday, 11 March 2016 17:02 BST - Written by John Cameron

STORY LINK Could ?Helicopter Money? Theory Send GBP EUR Exchange Rate Lower Still?

Euro (EUR) Exchange Rates Hugely Volatile Yesterday Following ECB Policy Decision

One of Mario Draghi’s press conference answers yesterday left analysts asking – “If ‘Helicopter Money’ is the answer, then what is the question?”

The European Central Bank Chief had much to say on various topics at yesterday afternoon’s Questions and Answers session, but one topic in particular caught the eye of FX Insiders. Draghi’s description of so-called ‘Helicopter Money’ as an ‘interesting concept’ roused the attention of analysts, in spite of the Italian central banker’s assertion that the ECB ‘hasn’t really studied the concept yet’.

His later suggestion that any further loosening of his Bank’s monetary policy would see ‘unconventional methods’ introduced provided further credence to the idea that ‘Helicopter Money’ could be a live possibility, although many argue it is too extreme a measure to ever get used.

Helicopter money is a highly controversial central bank policy first touted by economists of the Chicago School in the 1930s as a thought experiment. It was proposed as a solution to the ‘Liquidity Trap’ – a phenomenon which saw nervous retail banks hoarding cash in anticipation of more bad news to come – and plagued global economies at the time.

The ultra-low Central Bank interest rates during such times squeezed lender’s margins, providing further disincentive to lend. The proposed remedy of ‘Helicopter Money’ sees central banks ‘gift’ cash directly to consumers in the hope that they will spend it and provide their local economy with a kick-start.

EUR Exchange Rates Rallied in Response to Hopes that ECB Easing has Now Ended

Draghi’s comments could be viewed as an indication of the level of desperation which the ECB now feels regarding the potential for deflation in the euroland.


However, in the near-term, the single currency has improved against the Pound Sterling (currency : GBP) as market participants price-in the likelihood that the ECB has finished its current interest rate cutting cycle.

Ian Kernohan of Royal London Asset Management explained that, ‘the initial reaction of markets was very clear, the euro fell sharply and equities rallied. Draghi’s comment at the press conference that he thought further rate cuts were now unlikely, reversed this initial reaction. Looking through these very short term reactions however, the proof of the pudding will be a rise in eurozone inflation expectations and a further pick up in lending growth.’

Further near-term losses for the Pound Sterling euro exchange rate cannot therefore be ruled out.

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TAGS: Euro Forecasts Euro Pound Forecasts Pound Euro Forecasts Pound Sterling Forecasts