The European Central Bank is likely to signal a July interest rate rise on Thursday while continuing to provide banks with unlimited amounts of cash to help weaker lenders hit by the euro zone debt crisis.

The ECB is expected to use higher staff inflation forecasts, to be published during Thursday's post-policy meeting news conference, as justification for higher interest rates to come -- probably starting with a rise to 1.50 percent next month.

But it will be careful not to withdraw support to the economy and the banking system so fast as to stall the recovery or endanger banks' ability to cope with limited liquidity, which would add further pressure to short-term market rates.

The ECB raised its main refinancing rate to 1.25 percent from 1.0 percent in April, its first tightening in two years.

ECB President Jean-Claude Trichet is likely to say the ECB will exercise strong vigilance over price pressures, deploying a phrase that in the past signaled a rate rise was only a month away. He used that code in March to flag April's rate rise.

There will be no actual rate hike (in June), but the ECB will likely flag a July 25 basis point rate hike, while keeping full allotment on all its operations, Barclays Capital rate strategist Laurent Fransolet said in a note to investors.

Net, the ECB is likely to send a relatively hawkish message -- after all, growth in the euro area has been amongst the most resilient.

With inflation pressures holding up, the ECB will want to show it is determined to stop higher energy costs seeping into other prices.

In recent months, euro zone inflation has risen well above the ECB's target of just below 2 percent on the back of higher energy and food prices. It slowed marginally to 2.7 percent last month, but is seen remaining above 2 percent for some while.

Recent data also shows evidence of second-round effects -- where supply-related cost increases begin to have an impact on wage demands and other prices.

Producer prices in the common currency bloc rose more than expected in April, data showed on Monday.

The further spike up in euro zone producer prices in April reinforces belief that they will signal an interest rate hike, IHS Global Insight economist Howard Archer said.

HIGHER PRICES, GROWTH

ECB staff projections are likely to be lifted, both for inflation and economic growth.

In the last set of forecasts, published in March, the ECB forecast inflation of around 2.3 percent this year and 1.7 percent next. Those projections now seem outdated.

We expect them to feature significant upward revisions to the 2011 GDP and inflation projections, RBS analyst Silvio Peruzzo said, forecasting a new midpoint figure of 2.7 percent in 2011 and 1.9 in 2012.

The central bank is likely to also increase its euro zone growth forecast for this year after a positive surprise in the first quarter, when the annual rate hit 2.5 percent, while it is seen keeping next year's estimate around 1.8 percent.

LIQUIDITY FLOWS

The ECB is also due to announce its third-quarter liquidity plans.

While policymakers have said money markets have improved, the sovereign debt crisis -- focused again on Greece -- and fears it might spill over to the banking system will keep the ECB from reintroducing liquidity auctions.

Banks in bailed out euro zone members have been shut out of credit markets and data from the Bank for International Settlements showed German banks held $22.7 billion of Greek government debt at the end of December, down by over $3 billion in the fourth quarter but well above the $15 billion held by French banks.

The ECB started handing out unlimited cash in all liquidity operations in October 2008, after the collapse of investment bank Lehman Brothers intensified financial market turmoil.

Since then, it has scrapped the ultra-long six- and 12-month liquidity operations and moved back to auctions in three-month tenders last year. However, it returned to full allotment for those operations quickly after the Greek crisis intensified.

Even though the ECB has said the problem of banks being dependent on central bank funds is for governments to solve, it will be careful not to remove their lifeline without other measures in place.

Executive Board member Lorenzo Bini Smaghi said last week the central bank might not be ready to announce its plans this week, suggesting the bank may make a last minute decision at its July 7 meeting.

The ECB has committed to keeping tenders on an unlimited basis until at least July 12.

(Additional reporting by Marc Jones, editing by Mike Peacock)