By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) - The European Central Bank left its ultra-easy policy stance firmly in place on Thursday as inflation continues to undershoot its target into the fifth straight year, even as economic growth is on its best run since the global financial crisis.
The ECB even maintained its bias for further policy easing, leaving the door open to further rates cuts or an increase in asset buys. This is in line with market expectations but at odds with calls from Germany, the euro zone's economic powerhouse, for a gradual reduction of stimulus.
Still, ECB President Mario Draghi may acknowledge the bloc's improved growth prospects at a 1230 GMT news conference, pointing to solid growth momentum, economic sentiment hitting a 10-year high this month, and receding political risk after a pro-euro centrist candidate won the first round of France's presidential vote.
But Draghi will also probably argue that underlying inflation is showing few signs of recovery, wage growth is weak and risks are still abundant, so easing off the accelerator now could unravel years of work, a worry for major central banks around the globe.
Indeed, the Bank of Japan, also operating deep in unconventional territory, offered its most optimistic assessment of the economy in nine years on Thursday but signalled that it would maintain its massive stimulus effort.
Sweden's Riksbank also extended its own asset buys by 15 billion crowns ($1.70 billion) on Thursday, predicting the first rate hike in the middle of 2018, later than earlier projected.
Still, mild optimism from Draghi would follow years of extraordinary stimulus and waves of policy easing.
Having missed its 2 percent inflation target for years and even flirting with deflation, the ECB is buying 60 billion euros worth of bonds per month at least until the end of the year and plans to keep interest rates deep in negative territory until much later.
But economic growth is steadily picking up pace, inflation is comfortably above 1 percent and the ECB's policy arsenal is nearly depleted, all fuelling calls by conservative policymakers to start mapping out the way to the exit.
In a departure from the bank's long-held, more pessimistic stance, ECB board member Benoit Coeure, a key ally of Draghi, last week argued that the balance of risk for the economy is now largely balanced.
Coeure's view may not signal an imminent policy shift but suggests growing confidence in the outlook and a willingness to entertain the once-taboo subject of scaling back stimulus.
The euro weakened slightly against the dollar after the decision after trading near six-month highs, aided by expectations that pro-euro centrist Emmanuel Macron would win the French presidential vote next weekend.
JUNE SHIFT?
The ECB's next step, possibly in June, could include dropping a bias for more policy easing and changing the wording of Draghi's regular opening statement to reflect improved prospects for the economy.
Last month, the ECB removed one phrase from the statement -- a pledge to act "using all the instruments available within its mandate" if needed, signalling a diminishing urgency for more policy action.
Some or all the references to prevailing downside risks to the outlook, to the possibility of further rate cuts or to larger asset purchases may be taken out, sources with direct knowledge of the bank's deliberations have told Reuters.
Policymakers are likely to remain cautious, however, particularly those from the periphery of the bloc, where unemployment is high and wages are not rising.
"Before getting too enthusiastic, not all is well in the euro zone," ING economist Carsten Brzeski said before the decision.
Indeed, no rate change is expected for years to come and the next actual policy move other than a communication shift is likely to be an extension of asset buys beyond December, a Reuters poll of analysts found.
Still, conservative policymakers argue that too much stimulus may already be fuelling asset price bubbles, risking financial stability and eroding bank earnings so much that the measures could actually hold back lending and thwart growth.
The ECB may also need to preserve whatever firepower it still has left in case of renewed turmoil.
This suggests Draghi may use Thursday's news conference to keep expectations muted but still ready investors for an optimistic communication shift in June.
"If, as it now seems very likely, the French will elect a mainstream president, on June 8 the ECB will probably scale back some of its prudence," UniCredit economist Marco Valli said.
(Editing by Catherine Evans and John Stonestreet)
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