China on the mind of central banks

China is set to report its weakest full-year growth figure in 25 years on Tuesday on the back of slowing output and sagging investments, troubling news that will likely dominate discussion at the European Central Bank (ECB) and Bank of Canada policy meetings.

The poor figures bolster arguments for more Chinese monetary policy easing on top of the six interest rates cuts seen since November 2014 and suggest that more currency depreciation is coming to prop up corporate profitability.

An even weaker yuan will export China's deflationary pressures to advanced economies that are already struggling with anaemic price growth, amplified by a fall in oil prices to 12-year lows.

China's fourth quarter GDP likely slowed to 6.8 per cent from 6.9 per cent in the third quarter, the weakest reading since the global financial crisis, while full-year growth is seen at a 25-year low of 6.9 per cent.

The Chinese government is expected to target economic growth of at least 6.5 per cent in 2016.

Effect on the EU, Canada

Although China was a fading concern for central banks in recent months, market turbulence at the start of the year will likely propel it back on top of the agenda, particularly after another plunge in oil prices, a factor of weak emerging market demand.

Meeting for the first time since it cut interest rates and extended quantitative easing in December, the ECB is expected to remain on hold on Thursday but will likely express serious concern about emerging market prospects as the euro area inflation and growth outlooks fade.

Canada's central bank will have a tougher time deciding. Although most analysts expects rates to remain on hold at 0.5 per cent, markets see a bigger chance of a cut to 0.25 per cent on lower growth prospects, falling oil prices and a poor Bank of Canada survey. - Reuters