* ECB expected to keep interest rate unchanged at 0.25 pct
* No other policy steps expected until June at the earliest
* Draghi's comments on euro exchange rate eyed by markets
* Rate decision: 1145 GMT, news conference: 1230 GMT
By Eva Taylor
FRANKFURT, May 8 The European Central Bank is
expected to take heart from signs of life in the euro zone
economy and keep interest rates on hold on Thursday, resisting
pressure to act in the face of a stronger euro and persistently
Days before the Governing Council gathered in Brussels for
its May policy meeting, France's Prime Minister Manuel Valls and
the Organisation for Economic Cooperation and Development called
for more stimulus as the euro marched towards a 2-1/2 year high.
But while the ECB is expected to reiterate its concern about
the impact the strong currency has on already-low inflation, it
is not expected to act, at least not for now, as data points to
a firmer recovery and improved financing conditions.
"We expect nothing," said BlackRock portfolio manager
Lutz-Peter Wilke, whose multi-asset team has around $30 billion
under management. "We don't think there will be a cut in rates,
we don't think there will be further additional measures."
"The impact of the exchange rate will be the most
interesting topic of the news conference," he said, hoping to
get a sense for the ECB's pain threshold on the exchange rate.
A Reuters poll of more than 60 foreign exchange strategists
said the euro would need to reach $1.42 to spur policy action.
It was at $1.39 on Wednesday.
All but two in another Reuters poll of 63 economists expect
the ECB to hold interest rates at a record low of 0.25 percent
but roughly half of forecasters expect some form of stimulus in
the future, be it a rate cut or asset purchases.
Attention is shifting to the June meeting, when the ECB is
due to update its staff forecasts for inflation. Many economists
expect a downward revision after lower than expected readings in
March and April, which could set the stage for more stimulus.
ECB President Mario Draghi has several policy tools at his
disposal, including cutting rates or injecting more liquidity.
But the impact of such measures on the exchange rate and
inflation is seen as being limited. For more impact, the ECB
would need to turn on its money printing press, which is more a
complicated option and not expected to happen any time soon.
Draghi said in April that if the inflation outlook were to
deteriorate, the ECB could respond with a "broad-based asset
purchase programme", probably quantitative easing (QE) -
effectively printing money to buy assets.
Last week, however, he told German lawmakers at a
closed-door event that while low inflation would persist in the
euro zone, he did not expect deflation, a source who attended
the meeting said, adding that Draghi "made clear that we're
still some way off QE".
WAIT AND SEE
The economy is showing increasing signs of stabilisation.
Demand for home and corporate loans is expected to pick up,
an ECB survey showed, while polls of euro zone business
indicated on Tuesday they had a solid start to the second
Inflation rose to 0.7 percent in April, up from 0.5 percent
in March, but still below expectations. Forty of 52 economists
in a Reuters poll said euro zone inflation will not revisit the
0.5 percent or go any lower in the near future.
The bullish euro zone data helped boost the euro to its
$1.39 level, near the 2-1/2 year high hit in March, also because
of the economic weakness in the United States.
The ECB's talk about possible asset purchases also helped.
"Contrary to earlier expectations, recent dovish rhetoric
may have contributed to euro strength by attracting significant
capital inflows into the euro zone," BlackRock's Wilke said.
Italian, Spanish and Irish bond yields have hit record lows.
Euro zone companies, on the other hand, are feeling the
pinch with French tyre maker Michelin, cement maker
Lafarge and Germany's Linde saying they have
been hit by foreign exchange headwinds in the first quarter.
In its assessment, the ECB looks at whether the stronger
euro drives inflation lower and potentially threatens the
recovery or whether the rise is driven by returning confidence
and increasing capital inflows that lead to looser financing
conditions that stimulate demand over time.
(Editing by Jeremy Gaunt)