FRANKFURT, Feb 7 - The European Central Bank is expected to keep interest rates unchanged at its council meeting on Thursday but surprise news Wim Duisenberg will resign as president next year is likely to dominate the news conference.
Duisenberg's announcement came as ECB council members gathered for their meeting in the Dutch city of Maastricht and against a backdrop of a jump in euro zone inflation in January.
But the rise in inflation is seen as temporary -- a reaction to higher taxes and a seasonal spike in food prices -- and analysts said the euro zone economy is showing signs it does not need cheaper cash in order to recover.
The ECB is scheduled to announce its decision on interest rates at 1245 GMT and a news conference follows at 1330 GMT.
Earlier expectations by analysts the ECB would cut rates in February have now evaporated and in a Reuters poll last week 41 out of 45 economists said the ECB would vote to hold its key refinancing rate steady at 3.25 percent.
Duisenberg's decision to resign on his 68th birthday on July 9, 2003 paves the way for France to nominate a French national to succeed the sturdy Dutchman. But although Bank of France Governor Jean-Claude Trichet is France's candidate, a legal entanglement from an inquiry into the Credit Lyonnais bank has raised some doubts about whether he can succeed Duisenberg.
Signalling the ECB might stick to its guns on rates on Thursday, ECB Chief Economist Otmar Issing said last week the economic recovery could be stronger than earlier expected, while other top central bankers also voiced optimism on the single currency zone's economy.
Recent data from business surveys have provided first indications the euro zone economy may now have seen the worst. The euro zone's dominant services sector grew in January for the first time since August, data showed on Tuesday.
Moreover, the manufacturing sector, though still shrinking in much of the euro zone in January, did so at a markedly slower pace, the Purchasing Managers Index showed last week.
Such data may be the first confirmation of the ECB's outlook the euro zone would recover later this year after a weak start and amidst uncertainty over timing and strength of the upturn.
A rise in euro zone inflation in January will not have come unexpected to the ECB as the bank has said inflation could show short-lived increases in the first months of the year on its way towards a level below its two percent tolerance ceiling.
DUISENBERG RESIGNATION CONFIRMS EU DEAL
Financial markets welcomed the end of the uncertainty over Duisenberg's retirement plans, but some were quick to point out his announcement confirmed the existence of a "rotten compromise" struck by European Union leaders in 1998.
At the time, France was pushing for its candidate to take the top ECB post, while Duisenberg was backed by the rest of the EU countries, led by Germany.
In a hard-fought compromise, Duisenberg won the nomination, but France promptly said this was only because he agreed to step down early and because a "gentleman's agreement" with EU governments guaranteed that a Frenchman would replace him.
Duisenberg and most of the EU never confirmed the existence of such a deal, which many analysts saw as one of the birth-defect of the single currency.
"The announcement confirms that there was an agreement about the length of his presidency," said Thomas Mayer, chief European economist at Goldman Sachs and a leading ECB watcher.
"This is regrettable because it throws a shadow on the ECB and its independence."
The euro single currency first shot up on the news the gaffe-prone Duisenberg, whose off-the-cuff remarks had on a few occasions sent the young European currency reeling, was leaving. It promptly eased back to earlier levels. It was steady near day's highs against dollar around $0.8686 at 0845 GMT.