FRANKFURT: Persistently high inflation will prevent the European Central Bank from doing anything new on Wednesday to prop up the euro zone's shaky economic recovery, even with renewed worries about its fourth-largest economy, Spain.
While ECB President Mario Draghi has said that the worst of the debt crisis is over, resurgent concern about Spain and questions about whether Portugal will need a second bailout remain.
The bank, however, generally believes it has done as much as it can and that it is now up to governments and banks to deal with the debt crisis and its fallout.
Meeting on Wednesday this month ahead of Easter, instead of the usual Thursday, ECB policymakers face conflicting pressures from rising prices and an economy flirting with recession - factors that effectively cancel each other out.
This is despite the financial sector's health improving since the ECB injected over 1 trillion euros into the financial system in recent months.
Despite the money supply growing faster than expected in February, the euro zone economy took an unexpected turn for the worse last month, hit by a sharp fall in French and German factory activity that even the most pessimistic economists failed to predict.
"As far as economic data is concerned, there have been some disappointments, the data over the past couple of weeks has come in on the weak side," Commerzbank economist Joerg Kraemer said, though he added that it had it surprised on the positive side in the previous month.
This means that even though inflation has proved to be stickier than forecast - it ticked down marginally to 2.6 percent in March, but was higher than analysts in a Reuters poll had forecast - the ECB is not about to tighten policy any time soon.
It had to reverse two rate rises last year as the debt crisis came back with a vengeance and will be careful not to repeat the mistake of abandoning its low-rate policy too soon.
Analysts have pushed back their view on the next rate move, a Reuters poll showed. They now expect rates to have reached a floor - they equal a record low 1.0 percent - and tip them to go up late next year at the earliest.
SPANISH FLU
While the debt crisis has eased - probably faster than anyone at the ECB expected after its liquidity injections - Draghi will be careful not to exude too much optimism.
At Wednesday's post-rate decision news conference, he will be grilled on how worried he is about the possibility of Spain having to request a bailout after a rise in its refinancing costs. Returns on Spain's 10-year bonds fell to 4.65 percent in early February, but were back to about 5.3 percent on Monday.
Spain announced deep cuts to its central government budget on Friday as it battles to convince European partners and debt markets it can rein in its budget deficit in the face of growing complaints from the public. The savings for this year are around 2.5 percent of gross domestic product (GDP).
To prevent a new flare-up of Europe's sovereign debt crisis, euro zone finance ministers agreed on Friday to raise their financial firewall to 700 billion euros, drawing a positive initial reaction from G20 partners and markets.
Draghi will express satisfaction at the new and improved bailout fund, but will keep up the pressure for governments to cut budgets. He will also say the ECB has done its part in the crisis and push commercial banks to recapitalise.
But following the success of the ECB's 1-trillion-euro liquidity operation in easing the euro zone crsis, the danger grows that politicians become more complacent about pursuing reforms and opposition to austerity increases.
"The more successful the ECB is in bringing down the yields, the more difficult for politicians to push through reforms, which in the end means the sovereign debt crisis may come back," Kraemer said. "It may have become a victim of its own success."
EXIT WOUNDS
There is also focus on policy differences within the Governing Council.
Bundesbank President Jens Weidmann wrote a letter to Draghi in February, highlighting the policy differences between the stability oriented north on one side and south, which seeks short-term growth, on the other.
The German raised concerns over the bank's loose policies under which it hands out loans to banks and urged the ECB to reverse recent changes.
"I know in public, they try to calm down the conflict, but from a fundamental point of view, the views are very different," Commerzbank's Kraemer said.
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