8 April, AtoZForex, Lagos – Recently, there has been lots of discussions about the helicopter money. However, contrary to popular opinion, the European Central Bank (ECB) is not considering this policy measure, as clarified by top ECB officials on Thursday. Specifically, chief economist Peter Praet stated that the policy is “not on the table, it’s not even discussed” by the ECB’s 25-member governing council.
The basic principle of helicopter money is when a central bank wants to raise inflation and output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target.
HSBC on helicopter money
In fact, Peter Praet supported the earlier statement of Benoît Coeuré, a member of the ECB executive board, who rejected that helicopter money is part of the central bank’s main policy tools. However, HSBC analysts led by chief European economist Karen Ward argue that the helicopter money is already present.
We would argue that in a subtle form, the helicopters are already out in Europe. Thanks to the depressing effects of monetary policy on sovereign interest rates, fiscal policy is set to become considerably more expansionary in 2016. Indeed the key initiatives in the big four eurozone economies amount to 1.4% of GDP.
Praet defends ECB actions
ECB’s recent policy measure faced stiff criticism in Germany, as the ECB cut all three main interest rates, accelerated bond purchases to €80 billion ($91 billion) a month from €60 billion, and integrated a series of ultra cheap loans for banks. In defence of the bank’s policy measures, Mr. Praet argued that the ECB’s actions since June 2014 have “led to a substantial easing of financial conditions,” and said the ECB could launch additional stimulus to offset fresh shocks to the eurozone’s economy.
“If further adverse shocks were to materialize, our measures could be recalibrated once more commensurate with the strength of the headwind, also taking into account possible side-effects.”
Nevertheless, without the stimulus measures by the ECB, eurozone inflation is estimated to be in the region of half a percentage point lower in 2016 and 2017 than the ECB currently forecasts, while it will be around 1.5% smaller by 2018, according to Praet.
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