The European Central Bank on Wednesday kept interest rates the same for the region amid inflation decline, with money managers pointing out ECB President Mario Draghi's inflation target could be lower than 2%.
The ECB Governing Council decided to keep the interest rate on the main refinancing operations of the euro system at zero percent; the marginal lending facility at 0.25%; and the interest rate on the deposit facility at -0.4%, reiterating it will continue to do so at least through the end of 2019. All the rates are unchanged from March.
The council also confirmed reinvesting in full the principal payments from maturing securities purchased under the ECB's asset purchase program past the date when it starts raising key rates.
Announcing the decision, Mr. Draghi said that "incoming data continue to be weak, especially for the manufacuring sector, on account of a slowdown in external demand, compounded by some sector and country factors."
"Lower growth momentum is expected to continue into the year," Mr. Draghi said, pointing to a decline in inflation to 1.4% in March from 1.5% in February. "Headline inflation is likely to decline over the coming months," he said.
Responding to the ECB's decision, Mohammed Kazmi, portfolio manager and macro strategist at Union Bancaire Privee, said in an email: "(Mr.) Draghi is clearly concerned with not only the slowdown in the manufacturing sector, but also the continued decline in inflation expectations which led him to communicate that 2% is not a ceiling for the inflation target, taking a leaf out of Federal Reserve Chairman Jerome Powell's book."
"If we continue to see weakness in the manufacturing sector and a further decline in inflation expectations, then one would expect the council to offset its lower projections in June with further dovish rhetoric and details," Mr. Kazmi added.
UBP "came into the meeting long European duration due to the weakness in the data, where (Mr.) Draghi's tone has validated this view. We also think that it makes sense to hold more balanced portfolios with both duration and credit exposure at a time when central banks globally have clearly pivoted back in the dovish direction," he said.
Julien-Pierre Nouen, chief economic strategist at Lazard Frères Gestion, added in a separate email:"The main information is the confirmation that the ECB might consider a way to mitigate the impact of negative interest rates on bank intermediation. Yet Draghi showed tough love to banks by reminding that there is overcapacity in the sector and that high cost-to-income ratio areprobably a bigger cause for low profitability than negative rates. As regards the economy, the ECB acknowledges that there are some signs of weakening but that there is also some underlying strength in the euro area economy, and factors dampening growth are fading. Consequently, the current stance remains appropriate, but the ECB stands ready to act if negative risks materialize. He insisted that the ECB could use all instruments if needed."