Thursday 27 October 2016

Chinese economic outlook worries European Central Bank

Published 18/02/2016 | 13:31

Mario Draghi, president of the European Central Bank
Mario Draghi, president of the European Central Bank

European Central Bank officials expressed concern about turbulent financial markets and the increasingly dim outlook for China and other emerging economies in their last meeting.

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Members of the bank's 25-member governing council also debated whether current low levels of inflation in Europe could become chronic by being ingrained in wage and price agreements.

The concerns expressed in the summary of the January 21 meeting could push the council to add to its current stimulus measures when it next meets to review policy on March 10.

Europe's economy is recovering slowly with stronger domestic demand but faces risks from a slowdown in global trade that could hurt exports.

The bank could increase the size of its 60 billion euro (£46 billion) in monthly bond purchases, a step which drives down already low borrowing costs and pumps newly-printed money into the economy.

The ECB could also cut the rate on deposits that commercial banks store with the central bank even further into negative territory, from minus 0.3 per cent.

The negative rate is an unconventional step aimed at pushing banks to lend the money rather than hoard it.

In the summary, ECB members expressed concern that "global economic growth and global trade growth were decelerating in a context of heightened volatility in global financial and commodity markets and weaker global confidence".

"The environment had deteriorated in emerging market economies in particular," it added.

They also debated whether current low inflation - only 0.4 per cent annually - was working its way into the setting of wages and prices by businesses and workers.

That would make it even harder for the ECB to reach its goal of pushing inflation up toward its goal of just under two per cent, and would be another reason to enact more stimulus. Just under two per cent is considered healthiest for the economy.

In that context, members noted weaker than expected wage growth.

The no-names summary also related worries that slowing growth from China's rebalancing of its economy away from manufacturing and infrastructure construction toward consumer spending "could turn out to be more pronounced than expected and trigger a hard landing."

The concerns were similar to those expressed by the US Federal Reserve at its January meeting, according to minutes released on Wednesday.

Press Association

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