* ECB unlikely to lower rates or launch asset purchases
* Dovish rhetoric likely to focus on curbing euro strength
* Euro zone inflation down to 0.5 pct, lowest in four years
* Rate decision due at 1145 GMT, news conference 1230 GMT
By David Milliken
FRANKFURT, April 3 The European Central Bank
looks set to keep interest rates steady and offer no new aid to
the euro zone's fragile recovery on Thursday despite a fall in
inflation to its lowest in more than four years.
Policymakers have been willing in recent weeks to publicly
broach cutting deposit rates below zero - effectively charging
banks to hold cash with the ECB - or embarking on bond purchases
as the United States, Japan and Britain have.
A straightforward cut in the ECB's main refinancing rate to
0.1 percent from 0.25 percent - or more complex changes to
existing market programmes - are other possibilities.
But there has been little sense that a majority of officials
favours imminent use of any of those tools even though inflation
has been below 1 percent for six months. Instead most may prefer
to keep such policies on standby in case of an external economic
"Policy rhetoric should lean in the direction of dovish. But
it is unlikely that current economic and market conditions meet
the watermark for ECB action," said Lena Komileva, managing
director of G+ Economics.
News on Monday that annual inflation in the 18-member euro
zone fell to 0.5 percent appears insufficient to prompt action,
despite concerns among some economists that the bloc risks
slipping into a spiral of sinking prices and meagre growth.
Even after the data came out, 18 out of 22 money market
traders polled by Reuters forecast no change in policy, echoing
the finding of a larger Reuters poll of economists last week.
ECB Vice-President Vitor Constancio said the low rate of
inflation could hamper growth but that there was no risk of
deflation and that economic recovery would push prices up.
The ECB will announce its interest rate decision at 1145 GMT
and ECB President Mario Draghi will explain any further policy
decisions at a news conference at 1230 GMT at the central bank's
Draghi is likely to want to play up the ECB's readiness to
tackle downside risks to inflation, in order to stem a rise in
the euro, which last month hit its highest level against the
U.S. dollar since October 2011 and has a dampening effect on
import prices the more it climbs.
"A combination of persistent top-line inflation weakness and
persistent upward pressure on the euro will probably result in
more dovish ECB rhetoric on the central bank's willingness to
fight downside risks to inflation," Komileva said.
Pressure from abroad to act has mounted, most notably from
the International Monetary Fund.
"More monetary easing, including through unconventional
measures, is needed in the euro area," IMF head Christine
Lagarde said in a speech on Wednesday, outlining the Fund's
policy recommendations ahead of its spring meetings next week.
YEARS OF LOW
Last month, the ECB forecast it would take 2-1/2 years for
inflation to rise to 1.7 percent, which even then would barely
meet the target for annual price growth below but close to 2
That was insufficient to prompt a majority of policymakers
to back more monetary stimulus, and to change their minds now
would go against the central bank's practice of not reacting to
short-term moves in data.
That said, the ECB did cut its main interest rate in
November after a surprise drop in inflation in October to 0.7
Other economic indicators are similar to last month's,
suggesting the ECB outlook that the euro zone will record
economic growth of around 1.2 percent this year - the highest
since 2011 - holds good.
Nonetheless, there may well be debate on the merits of
One option on the table is cutting the deposit rate that the
central bank pays on the roughly 30 billion euros ($41 billion)
deposited with it to below zero - effectively charging banks if
they choose to hold money at the ECB rather than lending it out.
This has been tried out in recent years by the Danish
central bank while Switzerland has threatened similar. Such a
move could temper the euro but there is less evidence that it
would succeed in increasing lending.
Buying government assets with newly created money - as
favoured on a massive scale by the U.S Federal Reserve, Bank of
Japan and Bank of England - is a trickier prospect for the euro
zone even though Bundesbank chief Jens Weidmann, normally a
hardliner, has said it would be possible.
Only if deflation really looks like taking hold, will
opposition to that be overcome.
($1 = 0.7249 Euros)
(Editing by Mike Peacock)