European Central Bank divided over China risks

AP News
Posted: Jan 14, 2016 8:41 AM
European Central Bank divided over China risks

FRANKFURT, Germany (AP) — Policymakers at the European Central Bank disagreed at their last meeting over how big a threat turmoil in China and other emerging markets pose to Europe's modest economic recovery.

The result of the Dec. 3 debate, for which a written summary was released Thursday, was a decision to provide less stimulus to the 19-country eurozone economy than many had expected.

The ECB trimmed an interest rate and extended its bond-buying stimulus program, but startled markets who had predicted bolder action.

Some members of the ECB's 25-strong governing council thought that worries about China, a key export market for Europe, "had not been borne out."

Since then, market turmoil in China has only increased, with sharp falls in stocks that have helped drag down European and U.S. indexes as well. The impact of China's economic slowdown and troubles with debt on the overall global economy as opposed to financial markets remains unclear.

The ECB's decision took the deposit rate for funds left at the central bank by commercial banks to minus 0.30 percent from minus 0.20 percent. The negative rate is intended to push banks to loan the money rather than hoard it at the super-safe central bank deposit facility. The ECB also extended its €60 billion euros ($65 billion) per month in government and private-sector bond purchases by six months, through March 2017.

The stimulus is aimed at increasing inflation, considered too low at 0.2 percent, and stimulating the economy. Growth is improving but is still too weak to quickly bring down unemployment.

The summary also shows ECB members took different views on inflation, which the bank is struggling to push up closer to its goal of just under 2 percent. Some felt that market-based indicators of future inflation were too pessimistic.

ECB President Mario Draghi had expressed concern that slowing growth and financial turmoil in emerging markets such as China could hurt the recovery and delay progress in bring inflation back up. Low inflation is a sign of economic weakness and can kill off growth and investment if it becomes entrenched.

The approved stimulus reflected the proposal submitted by chief economic policymaker Peter Praet, who also sits on the six-member executive board that runs the bank day to day and prepares meeting agendas. Praet's proposal was already more modest than expected by markets, indicating advocates for more stimulus were fighting an uphill battle when the meeting began at the bank's skyscraper headquarters in Frankfurt.

Some board members called for adding more stimulus by making a larger cut in the deposit rate of 0.2 percentage points. At least one and possibly more members wanted to increase the size of the monthly bond purchases, but remained in the minority.

Yet some members did not want any more stimulus at all, after weighing the possible effectiveness of more bond purchases and the possible side effects. They argued that buying government bonds was an extreme measure that shouldn't be used "to fine-tune the inflation outlook" and that such purchases took pressure off governments to reform their finances.

ECB stimulus opponents have been led by Jens Weidmann, the head of Germany's Bundesbank national central bank.

The written summary, however, leaves out names and results of any voting to avoid putting political pressure on council members who are also heads of their national central banks. They are supposed to decide monetary policy for the eurozone as a whole, not favoring any one country.

The euro jumped sharply after the meeting, as the bank's decision wrong-footed currency traders expecting more stimulus. Central bank stimulus can weigh on a currency's exchange rate.