ECB frets over risks from China, Fed rate hike

The Pak Banker - - FRONT PAGE -

Volatil­ity in Chi­nese mar­kets may have more im­pact than ex­pected on the euro zone's frag­ile econ­omy, and an in­crease in US in­ter­est rates might also slow its re­cov­ery, the Euro­pean Cen­tral Bank said in the min­utes of its last meet­ing.

Eco­nomic re­cov­ery in the 19-mem­ber euro zone was mod­er­ate and grad­ual, a trend the ECB called "dis­ap­point­ing". Real GDP re­mained near 2008 lev­els, while the US econ­omy has re­bounded sig­nif­i­cantly, the ECB said in the min­utes, re­leased to­day.

The risk that growth would be slower that forecast re­mained, it said. Chief economist Peter Praet, a mem­ber of the ex­ec­u­tive board, noted that the ECB needed to con­tinue com­mu­ni­cat­ing that it was ready to use all its in­stru­ments given the "chal­leng­ing en­vi­ron­ment". "In par­tic­u­lar, fi­nan­cial de­vel­op­ments in China could have a larger-than-ex­pected ad­verse im­pact, given this coun­try's prom­i­nent role in global trade," the ECB said.

"This risk could be com­pounded by neg­a­tive knock-on ef­fects from in­ter­est rate in­creases in the United States on growth in EMEs (emerg­ing mar­ket economies)."

The Shang­hai stock mar­ket fell by more than 20 per­cent in the month be­fore the ECB's July 1516 meet­ing, and China's growth out­look has ap­peared to erode fur­ther in re­cent days.

The Chi­nese cur­rency has weak­ened around 4 per­cent in the past three days, and eco­nomic growth is ex­pected to slow from 7.4 per­cent in 2014 to 7 per­cent this year, its slow­est pace in a quar­ter of a cen­tury.

Weak ex­ports, slug­gish do­mes­tic de­mand and a cool­ing prop­erty mar­ket are all weigh­ing on the econ­omy. Even as China strug­gled and Euro­pean growth re­mained slug­gish, the US Fed­eral Re­serve was ex­pected to raise in­ter­est rates as soon as Septem­ber. An­a­lysts ex­pect the Bank of Eng­land to fol­low suit in the fol­low­ing months.

As­sess­ing its 60 bil­lion-euro-a-month as­set­buy­ing scheme, the ECB said the pro­gramme was on track and the in­fla­tion out­look was con­sis­tent with its medium-term tar­get of close to 2 per­cent. But the ECB added that it needed to see through the pro­gramme, which is set to run un­til at least Septem­ber 2016. Early data ap­pear to in­di­cate that the as­set pur­chases are mak­ing an im­pact, but fall­ing prices for com­modi­ties like oil and iron ore, along with China's eco­nomic slow­down, have in­creased talk that the ECB may need to do more to get prices up.

The 5-year/5-year swap rate, one of the bank's favourite in­di­ca­tors for long-term in­fla­tion ex­pec­ta­tions, has been fall­ing steadily for the past month. It dropped to 1.5 per­cent af­ter soar­ing to 2 per­cent in the spring when the bank launched its quan­ti­ta­tive eas­ing pro­gramme.

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