* Spain aims to sell 5.5 bln euros of bonds
* ECB expected to keep interest rates steady
By John Geddie
LONDON, April 3 Spain was set to tap into strong demand for peripheral euro zone bonds at a scheduled debt auction on Thursday, with yields holding just above 8-1/2-year lows.
Spain is expected to raise with ease the 5.5 billion euros it is targeting in taps of 2019, 2024 and 2026 bonds, even though Spanish consumer prices are dropping and the European Central Bank appears unlikely to address deflationary risks by cutting interest rates at its meeting later in the day.
"The flow in the periphery is so one way at the moment. There's incessant demand for peripheral paper and we think this rally has much further to go," one trader in euro zone government bonds said.
Spanish 10-year bonds were flat on the day at 3.28 percent, like other peripheral debt hovering just above multi-year lows.
The ECB looks set to keep rates steady and offer no new aid to the euro zone's fragile recovery, despite a fall in annual inflation in March to its lowest rate in more than four years.
Consumer prices in Spain, the bloc's fourth largest economy, fell 0.2 percent year-on-year.
Market participants will tune in to ECB President Mario Draghi's post-meeting news conference for clues on future policy decisions.
"Unless there are significant comments about quantitative easing or more concrete guidance for further rate cuts, yields should stabilise around these levels," said Rainer Guntermann, a strategist at Commerzbank.
Guntermann said markets were unlikely to make a sustained directional move until after U.S. non-farm payrolls data due on Friday.
France is also scheduled to auction debt on Thursday, via taps of its 10-year and 20-year benchmarks and a seven-year off-the-run bond, aiming to raise a combined 6.5-7.5 billion euros.
French 10-year yields were 1 basis point higher on the day at 2.15 percent. (Editing by John Stonestreet)