ECB keeps rates unchanged but June hike firmly on table

* Inflation hits 3% but economy barely grew

* Markets see at least three hikes starting in June or July

* Growth is tumbling on Iran war fallout

* Lagarde said hike option was discussed "at length"

By Balazs Koranyi and Francesco Canepa

FRANKFURT, April 30 (Reuters) - The European Central Bank left interest rates unchanged as expected on Thursday but extensively debated a hike to combat soaring inflation and signalled both on and off the record that it may pull the trigger in June.

Inflation jumped to 3% this month, soaring above the ECB's 2% target, and a further rise is expected as the Iran war has pushed oil prices to a four-year high and created industrial bottlenecks.

ECB President Christine Lagarde said the decision to hold rates was unanimous but the option of a rate hike was already put on the table as inflation developments were moving away from the ECB's 'baseline' projection, which already embeds market projections for two hikes.

"We debated the decision that we have unanimously taken today, but we also debated, at length and in depth, a decision to possibly hike," Lagarde told a news conference.

"We are certainly moving away from our baseline," she said of a scenario built around an early end to the war and a limited energy shock.

FIRST MOVE IN JUNE LIKELY Policymakers speaking to Reuters on condition of anonymity said there was broad agreement in the room that policy action will be needed in June, unless a peace deal was reached and energy prices tumbled.

This hike is likely to be the first of several moves and much of the debate on Thursday was already about the size and timing of ECB action, the sources added.

Money markets priced in around 75 basis points of ECB hikes over the next year, with the first step fully priced in by July and the second by September.

"The main take-away from today's ECB meeting can probably be described as another hawkish shift, introducing a clear hiking bias to its wait-and-see stance," ING economist Carsten Brzeski said.

"A rate hike, be it symbolic or even a policy mistake, at the June meeting has clearly become more likely today," he added.

ECB NEEDS TO SIGNAL COMMITMENT

Some economists were still not convinced by the need to raise interest rates, however.

The ECB can do little to stop an energy shock and would only need to act if energy inflation got entrenched in the economy, generating second-round effects.

But Lagarde was explicit that such effects are not visible and the fall in underlying inflation in April backed this view.

Moreover, longer-term inflation expectations remained well-anchored and economic growth was stalling.

"Their answer will likely boil down to the credibility argument: They need to hike to keep inflation expectations anchored, because the alternative - doing nothing - would be too risky," Frederik Ducrozet at Pictet Wealth Management said.

Even if the ECB ends up tightening policy, any rate hike cycle is likely to be more benign than in 2022, when the ECB had to lift its key rate by a combined 450 basis points in the span of a year to arrest runaway price growth.

Price pressures are far weaker now, the second-round inflation effects are not yet visible, the labour market is softer, rates are already higher to begin with, and economic growth is close to stalling.

This means the ECB must tread carefully. Some economists think the energy shock itself could cut as much as 0.5 percentage point off economic growth - roughly half of the bloc's projected expansion in the coming year.

The second quarter is already looking dismal due to the war, and the bloc's biggest economy, Germany, could even contract. Surveys this week showed business sentiment is plunging quicker than predicted, the services sector is deteriorating, corporate profits are dropping, exports are still reeling from tariffs, and banks plan to curtail firms' access to credit.

But central bankers around the globe have argued that six weeks make little difference in rate hikes, so it is worth waiting a bit longer to gain more certainty over price trends. The Bank of Japan, the U.S. Federal Reserve, the Bank of Canada and the Bank of England all also left rates unchanged this week, even while expressing concerns over price growth.

"Two hikes would lift the ECB's main policy rate to the upper bound of the range of its neutral rate estimates, and would primarily serve the purpose of managing inflation expectations," Konstantin Veit, a portfolio manager at PIMCO, said. (Reporting by Balazs Koranyi; Editing by Hugh Lawson and Toby Chopra)