ECB: Helicopter money could lift the mood in Europe
Christine Lagarde’s strategic review should usher in new targets and new tools at the European Central Bank, as the risks to growth rise and negative rates become counter-productive.
Europe is stuck in a rut and it’s getting dangerous. Monetary policy is looser than it’s ever been and there’s little chance it will tighten any time soon. Is helicopter money the way out?
If growth slows suddenly due to, for example, the coronavirus – or if the Brexit transition and a re-elected Donald Trump cause a bigger dip in trade – there will be calls for more monetary easing.
The Federal Reserve has a bit more space, but if the European Central Bank (ECB) cuts its deposit rate, now at minus 0.5%, it could be contractionary.
As I have heard time and again from economists, as well as bankers, further attempts to use the deposit rate to stave off deflation could end up hastening it by making life even less bearable for the banks.
The obvious response is that ECB president Christine Lagarde’s strategic review this year needs to herald a new approach and allow more radical measures.
Yes, governments should spend more, but will they, and what if they don’t? Is the central bank simply to give up? Just accepting lower inflation would damage the central bank’s credibility and make long-term negative rates more likely.