Financial markets will be watching the European Central Bank on Thursday for any hints that recent signs of an economic slowdown and the unrelenting debt crisis have lowered the chances of another rate hike this year. The bank, which sets interest rates for the 17 countries that use the euro, is almost certain to keep them on hold this month after raising them to 1.5 percent in July. While August is usually the bank’s quietest meeting of the year, the current situation -- as in most summers since the financial crisis erupted in 2008 -- is anything but ‘normal’. The euro zone’s debt crisis appears to have entered a new and potentially more dangerous phase, with Greece edging toward a default and Italy and Spain -- two of the bloc’s biggest economies -- also in the markets’ sights despite recent efforts by leaders to prevent contagion. The picture is complicated by an ugly run of data including weaker-than-expected growth figures and a worrying drop in economic confidence, and by an unexpected slowdown in inflation. Traders and investors now seem to be of the view that there will be no more ECB rate hikes for the foreseeable future. But economists, who tend to take a broader view, still see a steady drip of quarterly increases and believe the ECB will stick to its view that the bad data are part of a temporary soft patch rather than anything more dramatic. “I think there will still be a tightening bias shining through this meeting,” Klaus Baader, an economist at Societe Generale said. “They will continue to say the risks to inflation are on the upside but at the same time we expect them to be a little bit more cautious on the growth side. “The recent data certainly haven’t been good. I wouldn’t totally exclude (the possibility that) the ECB shift the risks to the growth outlook to being on the downside from broadly balanced, although it is probably still a little bit too early for that.” Credibility issues It would damage the ECB’s credibility if it had to scrap its rate hike plans after just two increases. The way ECB President Jean-Claude Trichet phrases the bank’s economic assessment will, as always, be key. Risks to growth have long been described as “broadly balanced,” and last month it reiterated that it was monitoring inflation “very closely,” which usually means that rate hikes remain on the agenda. Any changes would be seen as a clear hint that the central bank is getting cold feet about rate hikes. Trichet will also be quizzed about the decision by euro zone leaders to allow Greece to default as part of its new rescue package, a move the ECB had repeatedly warned could trigger another Lehman Brother-style meltdown. So far it has not. Some ECB observers say the snub by politicians has been a major blow for the bank’s credibility. Others argue the ECB’s doom-mongering was brinkmanship used to strong-arm the euro zone into giving the bloc’s rescue fund the power to intervene in government bond markets -- a monkey the ECB has long been desperate to get off its own back. “Journalists will try to get Trichet to admit a U-turn on its opposition to ‘selective default’... Trichet will probably argue it differently,” Deutsche Bank economists wrote in a research note. Getting political The recent shift of focus in the euro zone debt crisis to Italy and Spain and the U.S. debt wranglings will again dominate much of Trichet’s 1230 GMT news conference. He is unlikely to go beyond his usual lines that countries should urgently mend their finances, and may continue to call on the euro zone to further bolster its crisis defences. The ECB’s evolving political role will also be a hot topic. Euro zone leaders gave it the responsibility of overseeing any EFSF government bond purchases, a move which effectively gives it the power to spend taxpayers’ money. On the plus side, it will no longer be taking the risks on to its own balance sheet, cutting it free from the political implications of making bond purchases under its own name. Markets will be most eager to hear though whether the ECB is now prepared to intervene in bond markets again on its own as it waits for the EFSF to formally be given its powers. “There is a window over the next two to three months where if bond market pressures do build up the only actor in the system that has sufficient power to do something is the ECB,” said Deutsche Bank’s Mark Wall. “Would they be willing to respond (with bond purchases)? Because they have got something from governments, it might make the ECB more inclined to do it.”