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updated: 8/7/2014 8:05 AM

ECB leaves rates on hold as Ukraine crisis looms

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  • The euro sculpture in front of the headquarters of the European Central Bank, ECB, in Frankfurt, Germany. The crisis in Ukraine and a hesitant recovery in Europe are casting shadows over the European Central Bank's meeting Thursday.

      The euro sculpture in front of the headquarters of the European Central Bank, ECB, in Frankfurt, Germany. The crisis in Ukraine and a hesitant recovery in Europe are casting shadows over the European Central Bank's meeting Thursday.
    Associated Press

 
Associated Press

FRANKFURT, Germany -- The European Central Bank has left its benchmark interest rate unchanged at a record low of 0.15 percent as the crisis in Ukraine casts a shadow over Europe's modest economic recovery.

The decision Thursday was widely expected, in part because the ECB has little room to cut with rates so close to zero.

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Markets are now waiting to hear from bank President Mario Draghi at a news conference about his outlook for Europe's shaky recovery.

Draghi is not expected to announce further stimulus measures after unveiling a big package in June. The bank cut the benchmark rate and offered more cheap credit to banks. It is waiting for those steps to take effect before deciding whether to do more.

Recent economic data out of the 18 countries that use the euro have been mixed while the ongoing crisis in Ukraine has raised fears over the outlook.

Russia has amassed 20,000 troops on the border as Ukrainian government troops make gains against an insurgency by armed pro-Russian separatists, raising fears Russian President Vladimir Putin may order an invasion.

The U.S. and European Union have imposed economic sanctions on Russian officials and some companies. Russia has responded by banning most agricultural imports and food imports from those that have imposed sanctions on it.

Economists say the biggest threat from an escalation would be the blow it would deal to business and investor confidence. Business would hold off on investing in new projects simply because of uncertainty about what the future holds -- and that at a time when confidence has been building in the wake of the easing of the European debt crisis.

There are also more concrete ways Ukraine could affect the eurozone economy.

German companies such as Siemens AG do business there and could be affected by widening trade retaliation.

Economist Holger Schmieding at Berenberg Bank in London says that a 25 percent drop in exports to Russia and Ukraine could shave off 0.18 percent off eurozone GDP and 0.27 percent off Germany's. Those are relatively modest hits -- but Europe does not have much growth to spare these days either. The ECB predicts expansion of 1.0 percent this year.

So far the data have been mixed.

Italy slipped into recession in the second quarter, its economy shrinking by a quarterly rate of 0.2 percent. German industrial order have slipped and industrial production rose only 0.3 percent in June, less than expected.

However, surveys of activity in services and manufacturing, however, indicate the eurozone economy is growing. And unemployment is falling slowly but steadily, down to 11.5 percent in June from 12.0 percent from the same month a year ago.

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