FRANKFURT (Reuters) - The European Central Bank will signal its readiness to raise interest rates when it meets on Thursday and may use its 'strong vigilance' code words to signal a rise as soon as June.
The Frankfurt-based bank raised euro zone rates by a quarter of a percentage point to 1.25 percent last month, ending almost two years of record-low interest rates and beginning what economists expect to be a run of increases.
Just when the next rise comes will be the key issue on Thursday, with attention focused on the wording ECB President Jean-Claude Trichet uses in the opening paragraph of his post-meeting statement.
"We think it's June," said RBS economist Nick Matthews. "If we're correct in that, we would expect President Trichet to use the wording 'strong vigilance' on Thursday to signal that."
Trichet said precisely that in March to flag April's rate rise, deploying a phrase the ECB had used previously to signal a hike was only a month away.
For a July move, Trichet would probably repeat the language he used in April, when he said the ECB would "monitor very closely" upside risks to price stability.
A Reuters poll last Thursday showed a majority of 76 economists polled expected the ECB to raise rates next in July though data released a day later showed an acceleration in euro zone inflation to 2.8 percent in April.
The stronger-than-expected inflation reading, together with a survey showing factories in the euro zone ramped up production in April as prices rose at the fastest monthly rate in three years, have led some economists to lean toward a June hike.
"I expect them to send a signal for a move in June. We shifted (our view from July) simply because the leading indicators for April started to come in on the fairly resilient side," said Berenberg Bank economist Holger Schmieding.
Thursday's meeting will be the first attended by new Bundesbank chief Jens Weidmann, who on Monday stuck to the hawkish stance of his predecessor, Axel Weber, by saying monetary policy must be normalized.
April's ECB rate increase marked the first time the ECB has begun a series of rate hikes before the U.S. Federal Reserve.
The euro has raced higher since the April meeting, closing in on the $1.50 level as ECB officials focus on tackling price pressures while the Fed has signaled it is in no hurry to scale back its support for the U.S. economy.
Despite the rise in the currency, which makes euro zone exporters' goods more expensive outside the currency area, Trichet is unlikely to address the appreciation, which helps guard against import price rises.
"I expect him to say nothing new about the exchange rate," said Schmieding.
The ECB will hold its policy meeting in Helsinki, where a surge in support for the eurosceptic True Finns party in elections last month has raised concerns Finland could resist a bailout for Portugal.
The debt crisis has already taken a turn for the worse over the last month, with Portugal applying for aid and speculation mounting about a possible restructuring of Greece's debts.
The ECB will have to weigh up the risks to the weak euro zone periphery countries when assessing the need to check inflationary pressures in the 17-country currency bloc.
ECB Vice President Vitor Constancio said on Monday the spreads on peripheral sovereign bonds showed markets were not yet convinced enough has been done to solve the debt problems.
"That element of the crisis is still with us, it has not abated," he said. "It's very serious.
ECB policymakers have, however, stressed the separation of their standard policy tools -- interest rates -- from non-standard measures, including liquidity operations they use to help banks frozen out of interbank markets.
The ECB said in March it would carry on providing unlimited funding for banks at its three-month operations through to the end of June and would keep full allotment at its weekly and one-month operations, until at least July 12.
With the liquidity taps still turned on, the periphery's woes are unlikely to stop the ECB flagging a further rate rise.
"Since the April hike it should be clear that the ECB's monetary policy is targeted at the euro zone as a whole," said ING economist Carsten Brzeski. "The ECB continues to be a believer in one-size-fits-all. This is why we expect further rate hikes this year but at a moderate pace."
To soften the impact of its next rise in its main refinancing rate, the ECB could leave unchanged its subsidiary deposit rate -- now at 0.50 percent -- which commercial banks get when they park money at the ECB overnight and which acts as a floor for short-term market rates.
Editing by Mike Peacock