FRANKFURT (Reuters) - The European Central Bank is likely to signal on Thursday that it has done all it intends to do to fight the euro zone crisis, putting the onus back on governments after cutting interest rates and flooding the market with cash in recent months.
Banks have been shored up and government debt markets stabilized by two ECB cash injections totaling more than a trillion euros since December, steps which ECB President Mario Draghi says have averted a major credit crunch.
But other policymakers have expressed worries that the wall of cash could add to problems down the road, with German central bank head Jens Weidmann leading the charge for the ECB to think about an exit strategy.
While it is too early for the 17-country bloc's central bank to say anything publicly about when it plans to tighten policy, it has taken just two weeks for economists to back off forecasts that it will cut interest rates again within months.
"We may see not a really hawkish press conference, but a pretty clear statement that unless the economy takes another lurch down, that's it, we're finished, no more rate cuts, no more liquidity, we're done," Societe Generale economist James Nixon said.
Draghi said last month that the policymakers did not discuss cutting rates in that meeting and with the tentative signs of economic stabilization increasing, any pressure for them to ease policy further has diminished.
The ECB's wait-and-see mode also extends to its bond-purchase program, which has seen no action in the past few weeks.
However, Draghi is expected to offer no new information about the strategy, and just repeat the mantra that the program is ongoing. The recent liquidity glut has helped hold down the borrowing costs of especially Spain and Italy by encouraging banks in those countries to buy government bonds.
The ECB's latest set of staff projections will also be scrutinized for hints as to how long it might keep policy on hold - some analysts say the next rate move could be years away.
Thanks to rising oil prices, euro zone inflation has remained above the ECB's target of just below 2 percent and actually rose in February, the 14th month in a row prices have grown faster than the target.
With energy prices stubbornly high, the ECB's forecasts for 2012 and 2013 inflation could be raised from the current midpoint estimates of 2.0 and 1.5 percent, respectively, in the last round of forecasts published in December.
The 2013 estimate in particular is going to be looked at carefully, as it shows how the ECB views the impact of oil prices.
"If they assume that the inflation spike is temporary, it won't have much impact on the 2013 number and give room for rate cuts, but the rise in oil prices may change the way they assess the risks, they may see a bit more risk from this area," ABN Amro economist Nick Kounis said.
This year's growth outlook will be tuned down from the already paltry forecast of about 0.3 gross domestic product (GDP) increase and might come in slightly negative. Next year's growth is seen better, but still tepid.
"Growth seems flattish for quite some time, but they seem to be sort of okay with that as long as there is progress upwards," Kounis said.
In the post-rate decision news conference, journalists will push Draghi to air his views on the concerns that more hawkish policymakers have expressed about central bank easing policies.
There have been fewer options to do so, as policymakers have been sparse in their public appearances since Draghi took over in November. The ECB has, for example, not offered any public statements about its decision to exclude its Greek bond holdings from forced losses if the country were to push through collective action clauses.
While everyone has been satisfied with the immediate impact of the three-year lending offers, the more inflation-wary Governing Council members want to start talking about the potential these policies have to fuel imbalances and price hikes.
Bundesbank's Weidmann wrote a letter to Draghi, asserting his belief that the decision the ECB took in December to ease rules on the collateral banks must put up to tap its funding operations adds too much risk and should be reversed.
That communication revealed a fundamental split inside the Governing Council, largely based on the length of their time perspective and views on the central bank's role. Draghi's job could be complicated by the unsettling impact of Germany - Europe's largest and strongest economy - ending up several times in a row on the losing side.
Draghi must reassure Germany that the ECB respects the Bundesbank tradition and guarantees a strong euro, and he will resist airing disagreements on the Governing Council.
"When you have these things for 3 years, it really starts to test credibility and is more like QE (quantitative easing), which puts a lot of liquidity into the system for a long time," Kounis said of the long-term funding operations.
"Clearly the Bundesbank is not happy, but Draghi is not going to reflect on that."
Reporting by Sakari Suoninen; editing by Patrick Graham/Ruth Pitchford