* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
By Elizabeth Howcroft
LONDON, Jan 21 (Reuters) - Euro zone bond yields barely budged on Thursday, with debt markets focused on the European Central Bank's first meeting of the year, coming against a backdrop of growing challenges for the bloc's economy.
The ECB will announce its rate decision at 1245 GMT and is widely expected to keep its deposit rate unchanged at -0.5%. This will be followed by a news conference at 1330 GMT.
The central bank boosted emergency bond buys by 500 billion euros ($606.30 billion) at its last meeting in December, taking the Pandemic Emergency Purchase Programme's (PEPP) firepower to 1.85 trillion euros.
Since then, many European countries, including France and Germany, have tightened or extended coronavirus lockdown restrictions, casting doubt over the economic outlook for the euro zone.
"Despite the communication challenges ahead, we see no reason for the President to not lean on the dovish side given the near term outlook," ING rates strategists wrote in a note to clients.
"We do see room for EUR curves to reflatten again with the supply for the week out of the way after today's auctions," they added.
Investors will also be listening for comments from ECB President Christine Lagarde about yield curve control, after policymaker Pablo Hernandez de Cos said earlier in January that the ECB should consider this measure to raise inflation.
"Lagarde should reiterate the mantra that the ECB will take measures to 'preserve favourable financing conditions' and 'contain fragmentation', which is the ECB's version of yield curve control," Commerzbank rates strategists wrote in a note to clients.
"She should not affirm or may even deny speculation, however, that the ECB is pursuing specific spread targets," they said.
At 0820 GMT, the benchmark German 10-year yield was down half a basis point on the day at -0.534%.
For riskier Italian bonds, the 10-year yield was down by one basis point, at 0.573%.
Italy's bonds have come under pressure from political instability in Rome in the past two weeks. Italy's benchmark borrowing costs fell to their lowest in over a week on Wednesday after the government won a confidence vote in the senate, avoiding a collapse.
In a busy day for issuance, France is expected issue 12.5 billion euros worth of debt through a combination of new issuance and re-opening existing bonds. Spain is expected to tap four bonds with maturities between 5 and 20 years for up to 6.5 billion euros. ($1 = 0.8247 euros) (Reporting by Elizabeth Howcroft; Editing by Kim Coghill)