Analyst: ECB closer to ‘helicopter cash’ policy

The ECB is running out of road with its efforts to boost the moribund eurozone economy and may have to consider giving money directly to households, leading economist Alan McQuaid has said.

The comments come after the ECB’s chief economist, Peter Praet, said the central bank can cut interest rates again if the eurozone’s economy fails to pick up and, under extreme circumstances, it might even consider printing money and giving it out directly to people.

“The comments from the ECB’s Praet and Draghi have exerted some pressure on the euro,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London.

The ECB upset investors over a week ago when its president, Mario Draghi, said he did not expect further rate cuts, raising questions about his pledge in 2012 to do “whatever it takes” to save the euro.

Markets have since stabilised and Mr Draghi said on Thursday ECB rates would stay at current or lower levels for a long time.

But the comments in an Italian newspaper by the ECB chief economist show the central bank is getting impatient with the limited success of its measures to spur growth and offset the risk of deflation in the eurozone, said Mr McQuaid, chief economist at Merrion Capital.

Mr McQuaid said the comments betray “an air of desperation”.

He said he was sceptical that any more ECB rate cuts could boost the eurozone and the central bank may be getting ever closer to considering other, more direct, measures such as giving money directly to eurozone households.

Such unconventional measures are commonly referred to as dropping cash ‘by helicopter’ on households through tax credits or soft loans.

The comments may also be designed to keep the euro from rising any further in the coming weeks, Mr McQuaid said.

In his comments, Mr Praet said rates have not reached their lower limit, even if the ECB is aware of the negative impact that its negative deposit facility — effectively a charge on banks’ deposits with the ECB — has on lenders’ margins.

“As other central banks have demonstrated, we have not reached the physical lower boundary,” he told newspaper, La Repubblica.

Mr Praet added that if “negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armoury”.

Asked whether the ECB could simply print money and distribute it to eurozone citizens, an extreme form of policy easing first envisaged by US economist Milton Friedman using the metaphor of a flying helicopter dropping money, Mr Praet said this was a possibility, at least in theory.

“Yes, all central banks can do it,” Mr Praet said.

“You can issue currency and you distribute it to people. That’s helicopter money,” he said.

He cautioned, however: “The question is, if and when is it opportune to have recourse to that sort of instrument, which is really an extreme sort of instrument.”

The ECB cut all three of its main interest rates over a week ago and said it would buy corporate bonds issued by eurozone firms that have an investment grade rating and are not banks.

ECB can still cut rates further below zero if recovery falters, board member says https://t.co/CXP926UBnU pic.twitter.com/v1tJ05IVlg

— Bloomberg (@business) March 18, 2016