* Leaves policy unchanged
* Drops reference to lower rates
* Likely to trim inflation forecasts
* May drop reference to downside risks
(Adds rate decision)
By David Mardiste and Francesco Canepa
TALLINN/FRANKFURT, June 8 The European Central
Bank kept its money taps wide open on Thursday but dropped a
reference to possible interest rate cuts, an unexpectedly
hawkish move as euro zone growth accelerates.
The currency bloc's economy has been on its best run since
the global financial crisis nearly a decade ago but the ECB was
expected to take a more cautious stance as the inflation rebound
has yet to show a convincing upward trend.
"The Governing Council expects the key ECB interest rates to
remain at their present levels for an extended period of time,
and well past the horizon of the net asset purchases," the bank
said, removing a long-standing reference to lower rates.
It kept its easy money policy unchanged as widely expected,
however, including its 2.3 trillion euro ($2.59 trillion)
bond-buying programme and sub-zero interest rates, despite
resistance from cash-rich Germany.
ECB President Mario Draghi holds a news conference in
Tallinn at 1230 GMT, in which he will give updated staff
economic forecasts and is likely to acknowledge the euro zone's
broadening and accelerating growth performance.
Sources have told Reuters the ECB is likely to nudge up its
growth forecasts but trim some of its inflation projections,
indicating that its stimulus is working but remains needed.
That mixed outlook had been expected to underpin the case
for keeping the ECB's easy policy in place, including the
commitment to cut rates further if necessary.
The ECB also maintained its pledge to increase its asset
purchases if necessary.
Draghi is also expected to declare risks to growth
"balanced", giving up a long-established more pessimistic
stance, a move that is seen as a nuanced but definite step
towards policy normalisation after years of stimulus.
The euro was trading broadly unchanged against the
dollar, not far from a seven-month high of $1.1285 hit earlier
With Thursday's decision, the ECB's deposit rate, its key
policy tool, remains at -0.4 percent. Its monthly asset
purchases will continue to total 60 billion euros a month and to
run until at least December.
Among other factors making the ECB cautious are big debts
overhanging governments and companies, the piles of unpaid loans
weighing on banks in countries like Italy and Portugal, and
political uncertainty ahead of elections in Germany and Italy.
But any announcement on its quantitative easing (QE)
programme is likely to be put off until the autumn, when
policymakers hope the economic picture will have become clearer.
Asset purchases under the programme are due to continue at least
until December at a pace of 60 billion euros per month.
"We still expect a compromise to be reached, implying more
QE into next year, but at a reduced monthly pace," economists at
Societe Generale said in a note before the rate decision.
"While data-dependent, we also expect further quarterly 10
billion euro reductions, ending QE in September 2018."
Draghi is also certain to face questions about failing
Spanish lender Banco Popular, which was bought by rival
Santander on Wednesday in an ECB-orchestrated rescue.
Investors were wondering if the ECB move on Popular would
have implications for two struggling banks in Italy's Veneto
region, which like Popular are weighed down by bad loans.
Hours after the Popular's rescue, sources have told Reuters
Italian banks are considering assisting in a rescue of Popolare
di Vicenza and Veneto Banca by pumping 1.2 billion euros of
private capital into the two regional banks.
(Writing by Balazs Koranyi; Editing by Catherine Evans)