ECB
frets over risks from China, Fed rate hike
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[August 13, 2015]
By Balazs Koranyi and Frank Siebelt
FRANKFURT (Reuters) - Volatility in Chinese
markets may have more impact than expected on the euro zone's fragile
economy, and an increase in U.S. interest rates might also slow its
recovery, the European Central Bank said in the minutes of its last
meeting.
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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 U.S. economy has rebounded
significantly, the ECB said in the minutes, released on Thursday.
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)."
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The Shanghai stock market fell by more than 20 percent in the month
before the ECB's July 15-16 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
U.S. 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.
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Assessing its 60 billion-euro-a-month asset-buying scheme, the ECB
said the program 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 program, 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 favorite 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
program.
(Editing by Larry King)
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