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ECB worried about economic slowdown in China, minutes show

The European Central Bank may have to consider fresh policy measures to prevent deflation in the single currency area, but will not move at its meeting Thursday, analysts said.

[FRANKFURT] The European Central Bank acknowledged Thursday that its governing council is concerned about the economic slowdown in China, even if the impact appears to be fairly limited for now.

"Financial developments in China could have a larger than expected adverse impact, given this country's prominent role in global trade," the governing council said, according to the minutes of its meeting on July 15 and 16 released on Thursday.

Nevertheless, the fallout from the Greek crisis and slowing growth in emerging economies such as China were still fairly limited so far, the council agreed.

"Uncertainties stemming from developments in the Greek programme negotiations and from the deteriorating economic and financial conditions in some (emerging economies), most notably China, did not appear to have had a discernible impact on euro area economic activity," the minutes stated.

"This pointed to a certain degree of robustness of the ongoing recovery, as supported by some country-specific developments." The ECB publishes the minutes of its governing council's monetary policy deliberations four weeks after each meeting.

Turning to Greece, which is negotiating a third bailout programme with its creditors, "recently improved prospects (for a deal) ... could be expected to contribute to a firming of confidence across the euro area," the ECB said.

"Nevertheless, setbacks in those negotiations could still negatively affect confidence and activity, and some caution was expressed regarding potential contagion risks in particularly adverse scenarios, which should not be underestimated," it cautioned.

The governing council believed that the accommodative monetary policy conditions in the euro area should be maintained and that the ECB would remain ready to deploy additional policy measures in the case of a financial shock or sudden change in the inflation outlook.

"Overall, the recovery in the euro area was expected to remain moderate and gradual, which was considered disappointing from both a longer-term and an international perspective," the minutes stated.

In March, the ECB embarked on a programme of so-called quantitative easing or QE, a massive 1.14-trillion-euro (S$1.8 trillion) sovereign bond purchase scheme aimed at bringing area-wide inflation back up to levels consistent with healthy economic growth.

Under the QE programme, the ECB aims to buy 60 billion euros of bonds per month until September 2016.

Since its launch in March, top ECB officials are convinced that the purchases are having the desired effect and inflation rates in countries such as Germany and France are gradually moving upwards.