By Yoruk Bahceli and Stefano Rebaudo
LONDON/MILAN (Reuters) -The European Central Bank is set to hold interest rates steady for a second straight meeting on Thursday, with investors watching for any hints that the bank is done with cutting them.
A hawkish tone from ECB chief Christine Lagarde in July dented market expectations for further moves. A U.S.-EU trade agreement followed and the economy is holding up, so Frankfurt has little need to act now.
“Right now they’re quite comfortable staying put,” said Zurich Insurance Group’s chief market strategist Guy Miller.
Here are five key questions for markets:
1/ What will the ECB do on Thursday?
Leave its key rate on hold at 2%.
Inflation has been slightly higher than expected since the last meeting and first-quarter growth was double ECB expectations, while the trade deal with the United States has reduced uncertainty. So policymakers have little reason to either cut rates now or signal what’s next.
“They wanted to be deliberately uninformative about future interest rate decisions. So overall, that’s what we’ll get,” said HSBC chief European economist Simon Wells.
2/ Does the EU-U.S. trade deal change the economic outlook?
At first glance, not much.
The EU’s 15% tariff deal is not far off from the ECB’s baseline 10% expectation, Lagarde says.
Some economists caution the tariff hit to the economy remains uncertain and will increasingly feed through in the months ahead. Further escalation is also a risk.
“I would be a bit more critical or sceptical about the deal than the ECB will probably be in its meeting,” said ING’s global head of macro Carsten Brzeski.
3/ Is the ECB done cutting rates this cycle?
Not necessarily. Several policymakers have not ruled out another move and the ECB is divided on whether inflation will tick lower or higher than expected.
Economists polled by Reuters reckon the ECB is done. Traders see around 70% chance of one more cut, but only by next summer.
Those who reckon the ECB is done say Lagarde set a high bar for further moves and the outlook will need to deteriorate to warrant one. Some expect a hike next given German stimulus.
But a bigger-than-expected growth hit from tariffs, bond market stress, U.S. rate cuts pushing the euro higher and inflation even lower are reasons that cuts could resume, others say. The ECB sees inflation falling well below its target next year.
The central bank’s updated economic projections are also in focus. Economists broadly expect slight upgrades to 2025 growth and inflation projections, but are more divided on next year.
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