ECB's Muller Warns of Inflation Risks from Chinese Rare Earth Export Curbs

ECB's Madis Muller warns that Chinese export curbs on rare earths could fuel inflation in the euro zone. The measures could lead to shortages and higher prices for certain products, despite the standard narrative suggesting a deflationary impact. ECB officials are cautious, predicting price growth to temporarily drop below 2% target next year before re-accelerating in 2027. The risks to this projection are balanced, with both upside and downside risks to inflation.

The European Central Bank (ECB) has expressed concerns that Chinese export curbs on rare earths could fuel inflation in the euro zone. The measures, which require overseas firms to obtain Chinese government approval before exporting products containing rare earths, could lead to shortages and higher prices for certain products, according to ECB Governing Council member Madis Muller. Muller's comments come as global economic leaders gather in Washington for the IMF and World Bank's fall meetings, according to the US Treasury chief.

Muller warned that the export controls could have an inflationary impact on Europe, contrary to the standard narrative that suggests additional tariffs have a deflationary effect. He stated, "China’s export controls show how barriers to free trade introduced by other countries can have an inflationary impact also in Europe," according to a Bloomberg report. The ECB predicts that price growth will temporarily drop below its 2% target next year before re-accelerating in 2027, with both upside and downside risks to inflation, the Bloomberg report said.

The situation has reignited investor fears of a trade war between the United States and China, with the US threatening an additional 100% tariff on Chinese goods in response to the export controls, the Yahoo article noted. US Treasury Secretary Scott Bessent has urged cooperation with allies to diversify supply chains away from China, while US Trade Representative Jamieson Greer has warned that US plans for a tariff hike or other export controls are in the works.

ECB officials are cautious, with most officials saying there's no need to change borrowing costs any time soon unless there's a new shock to the economy. Muller emphasized the need for patience, stating, "We should be patient and then take our decisions based on whatever dynamics we see in the economy in the coming months," the Bloomberg report added. The ECB's steps could go in either direction, depending on the actual developments in the economy.

The situation highlights the geopolitical risks to the global economy and the need for coordinated responses to trade disputes. As leaders of the world's two biggest economies prepare to hold talks at the Asia-Pacific Economic Cooperation (APEC) summit, the potential impact of the rare earth export curbs on the global economy remains a significant concern.