The European Central Bank is expected to keep interest rates on hold later on Thursday and signal that it has played its part in fighting the euro zone crisis after unleashing a dramatic sweep of measures that has unsettled some at the bank.

ECB President Mario Draghi is likely to put the onus on governments to fight the crisis now after the central bank pumped over 1 trillion euros into the euro zone banking system in the last two months with twin three-year funding operations.

The ECB cut rates twice late last year to a record low of 1.0 percent and the policymaking Governing Council, which started meeting at 0800 GMT, is likely to hold the main refinancing rate at that level. The latest Reuters poll of 74 economists suggests it will do so until well into 2013.

The euro zone economy has stabilized over recent months, in part thanks to the ECB's back-to-back rate cuts in November and December and the twin funding operations, which brought calm to euro zone debt markets.

But that is likely to be it. Draghi, who faces unease among his fellow Council members about the risks the ECB has taken on with the funding operations, told EU leaders last week it was now up to them to revive growth by implementing reforms.

They are not going to announce anything on rates or extraordinary measures or anything like that, said Erik Nielsen, global chief economist at Unicredit. In terms of tone, I expect Draghi to say: A lot of money has been put out there now, let's see it be put to work, he added.


Financial markets will also scrutinize the ECB's latest staff projections for changes in forecasts for growth and inflation, looking for hints whether the recent 20 percent rise in oil prices is rekindling inflation concerns at the bank.

Inflation has come off last year's peak of 3 percent as growth in the crisis-stricken euro zone has slowed, but it climbed again last month, remaining above the ECB's inflation target of just below 2 percent for the 14th month in a row.

I would be surprised if the conversation would be about inflation, said Nielsen. If asked, almost for sure Draghi is going to say that any rise in the oil price will have only a temporary inflationary impact and so long as it does not spill into inflation expectations, it's not an issue.

Forecasts for 2012 and 2013 inflation could be raised from the respective midpoint estimates of 2.0 and 1.5 percent in the last round.

At the same time, growth expectations are likely to be cut. France, Europe's second largest economy, is set for flat economic growth in the first quarter, the country's central bank said on Thursday, adding that its indicator for industrial activity dipped in February.

December's ECB projections showed euro zone gross domestic product in a -0.4 percent to +1.0 range this year - optimistic compared with the latest Reuters poll consensus for a 0.4 percent decline.

Draghi, however, in the 1330 GMT news conference is likely to stick to the bank's view that there are tentative signs of a stabilization now showing in the economy.

The ECB is likely to signal that it expects a gradual stabilization of economic conditions to continue, said Nordea economist Anders Matzen. It's quite clear that the LTROs have substantially removed the downside risk to the economic outlook for the euro zone.


For a package of ECB graphics, click:



The ECB earned widespread praise for averting a euro zone credit crunch with its three-year loans - handing out 489 billion euros in December and 530 billion euros in February - and by loosening the rules for collateral banks can use in exchange for central bank money.

However, some policymakers are worried.

Bundesbank President Jens Weidmann aired his concerns in a letter to Draghi last month. Juergen Stark, the ECB's influential former head of economics, added his criticism by telling a German newspaper on Thursday that the quality of the central bank's balance sheet was now shocking.

While Draghi is likely to be asked about the issue, Unicredit's Nielsen expects a tight lipped response.

Draghi is not going to take the Governing Council's laundry into public, he said. He is way too smart to get into any of that.

In his letter, which was leaked to the conservative German newspaper Frankfurter Allgemeine Zeitung on the day of the ECB's second dose of three-year funds, Weidmann wrote about the imbalances in the euro zone's payment system, TARGET2, and the resulting risks for the Bundesbank, which would be exposed in the unlikely event of the euro zone breaking up.

Credit Suisse economist Christel Aranda-Hassel sees the letter as a way for Weidmann to tend to the German public.

At the end of the day, the Bundesbank has to answer to the German public. ... Weidmann is not projecting the end of the euro zone, but he has to keep German interests in mind. That's his job as head of the Bundesbank, Aranda-Hassel said.

Another issue which may need explaining is the ECB's decision to swap its Greek bonds to avoid taking losses and thereby breaking the taboo of directly financing governments as Greece's debt restructuring comes to a head.

Greece's private creditors must decide by Thursday evening whether they take part in the debt swap that is a key part of Greece's new 130 billion bailout package. Failure to secure the deal may put the rescue package at risk and open up the threat of a chaotic debt default of Greece.

(Editing by Catherine Evans)