Thursday 29 September 2016

ECB may focus on inflation as China acts to shore economy

Published 27/08/2015 | 02:30

The ECB announcement comes as China pumps 140bn yuan into its economy to shore up international confidence
The ECB announcement comes as China pumps 140bn yuan into its economy to shore up international confidence

The European Central Bank will take extra action to stimulate Europe's economy if needed, a senior official with the Frankfurt-based body has said.

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Executive Board member Peter Praet warned that there is an increasingly risk that the ECB will miss its medium-term inflation target.

The bank is already buying up €60bn worth of assets each month in a bid to boost the fragile recovery and bring inflation closer to the ECB's target of in and around 2pc.

Mr Praet, who is also the ECB's chief economist, said the bank's commitment to doing this should not be underestimated.

"Developments in the world economy and commodity markets have increased the downside risk to achieving the sustainable inflation path towards 2pc; the risk has increased," he said.

"There should be no ambiguity on the willingness and ability of the governing council to act if needed."

Whether his comments could be interpreted to mean that the ECB would boost its quantitative easing programme remains to be seen.

His comments came as China pumped 140bn yuan into the country's economy in a bid to shore up international confidence.

The People's Bank of China (PBoC) injected billions of yuan into the interbank money market via a short-term liquidity operation, the bank said on its website.

But the action had little effect domestically yesterday, as the Chinese markets closed before it was announced.

Activity in China's manufacturing sector likely shrank at its fastest pace in three years in August, a poll by Reuters shows, highlighting the slowing economy.

Ian Quigley, director of investment strategy at specialist bank Investec, said the global economy has sufficient momentum to withstand the likely impact of a China slowdown.

"It is nonetheless a significant event," Mr Quigley said.

"Whilst a number of the sentiment measures we look at are now screaming 'buy', we believe markets may remain somewhat skittish until investors are reassured that the slowdown in certain parts of the Chinese economy is manageable, whether that is via policy actions from Chinese authorities or evidence that such actions have underpinned growth as the Chinese economy continues to rebalance," he added.

"We do ultimately expect to see this evidence and thus we expect markets to recover. We are therefore maintaining our overweight equity stance across our investment portfolios."

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