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Frankfurt - The European Central Bank's key concern, inflation, shows no sign of abating but that is unlikely to push policymakers into an early interest rate hike given wider concerns over the economic outlook, analysts say.
"Despite the tough talk, we think that concerns about an early rate hike are overblown and we believe that the ECB will likely stay on hold until next year," Morgan Stanley economist Elga Bartsch said in a research note.
While president Jean-Claude Trichet has warned that the ECB will take a harder line to counter expectations that inflation of 2.4% might spike higher, markets think the bank's key interest rate will stay put at 1.0%, with September often cited as a probable date for an increase.
"He is unlikely to go as far as preparing the ground for an imminent hike in interest rates" during a press conference that follows the rate decision on Thursday, said Ben May at Capital Economics.
The ECB will also release its latest staff forecasts for inflation and growth, and the revised inflation outlook for 2012, currently 1.5%, should give a clearer idea of when interest rates might begin to rise.
On Friday, the central bank said growth in its M3 money supply indicator had eased a bit, suggesting severe inflation pressure had not built up.
Eurozone manufacturing and service activity climbed this month to levels last seen in July 2006 but growth is uneven across the 17-nation bloc and the ECB has kept low lending rates so as to help the recovery and debt-burdened countries such as Greece, Ireland and Portugal.
"The ECB might be reluctant to tighten monetary policy in case it pushes the peripheral economies back or deeper into recession," May said.
But Trichet could announce changes to liquidity programmes, possibly indicating a move away from offering unlimited, three-month funds so as to wean dependent commercial banks off what was meant to be a temporary measure.
The central bank also has an eye on the next round of European Union bank stress tests that will be tougher than a now discredited exercise held last year.
"Ideally, the ECB would want to get the planned bank stress test - and the policy action in terms of bank restructuring and bank recapitalisation that it will hopefully bring - out of the way before starting to tighten monetary policy," Bartsch said.
The ECB has downplayed the longer-term effects of higher energy and food prices but clashes in Libya have pushed oil back to highs near $120 a barrel, the highest level since August 2008.
That could pose a challenge to Trichet's handling of the inflation threat.
"The rise in headline inflation - which may accelerate further depending on geopolitical developments - is putting the ECB in a difficult spot," Goldman Sachs economist Dirk Schumacher said.
Schumacher said that some ECB governors could begin to have "nagging doubts" that measures like the controversial purchase of eurozone government bonds "is starting to dent the ECB's credibility."
That might lead Trichet to ratchet up the rhetoric and underscore the bank's determination to keep inflation in check, fueling expectations of a rate hike.
A benign 2012 inflation forecast could calm such speculation, on the other hand.
Analysts expect the figure for 2011 to be raised from 1.8% to around 2.2%, above the ECB target of below but close to 2.0%.
For 2012, many expect a forecast of around 1.7%.
In terms of growth, the 2011 figure of 1.4% could also be upgraded to about 1.7%, while the number for 2012 could remain at 1.7%.
