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Economy

ECB stands pat on rates prompted by weak data

European Central Bank President Mario Draghi

Geopolitical factors and protectionism lead list of economic concerns

The European Central Bank stood firm on interest rates for the region amid weaker than expected data, with money managers unsure that a hike is in the cards this year.

The ECB's governing council decided to keep the interest rate on the main refinancing operations of the euro system at zero; the marginal lending facility at 0.25%; and the interest rate on the deposit facility at -0.4%.

Announcing the decision, ECB President Mario Draghi said the risks surrounding the eurozone's growth outlook "have moved to the downside on account of the persistence of uncertainties related to political factors and the threat of protectionism, vulnerabilities in emerging markets and financial volatility."

Mr. Draghi also cited weaker than expected "income information ... on account of softer external demand and some country- and sector-specific factors." He added that geopolitical factors and the threat of protectionism were in particular "weighing on economic sentiment."

The ECB's decision was expected by money managers, who think the likelihood of an interest rate hike this year is low.

"As widely expected, the European Central Bank left its key policy rates unchanged and maintained its forward guidance," said Charles St-Arnaud, senior investment strategies at Lombard Odier Investment Managers, in a statement. "The meeting comes at an interesting economic juncture: Since the central bank's December meeting, global markets have corrected, with (German) bund yields reaching levels not seen since 2016, and more data signaling that the eurozone economy slowed meaningfully in late 2018."

If anything, Lombard Oldier believes that the ECB is more likely to provide some support to the economy by issuing a third wave of targeted longer-term refinancing operations, a non-standard monetary policy tool that provides financing to banks and gives them an incentive to increase lending to businesses and consumers. The ECB launched its first TLTRO program in 2014 and a second in March 2016.

"Those operations were mentioned at the meeting, but the ECB has yet to take a decision, likely waiting for the next round of forecasts at the March meeting. In addition, it seems likely that the ECB could change its forward guidance in the near future to suggest no hike at least through 2019, raising the prospect that perhaps the ECB may be unable to hike at all in the current cycle," Mr. St-Arnaud added.

"For now, the ECB does not appear in a rush to alter its course, but the window of opportunity to normalize policy may be closing rapidly," said Antoine Lesne, head of Europe, Middle East and Africa strategy and research at SPDR ETFs, in a statement. "Other tools remain at the disposal of the ECB to help return to higher levels of core inflation, which is stuck around the (0.9% to 1%) range. We expect the euro to weaken a little further and for core sovereign yields to remain around their recent low range before we see more positive news on other global fronts."