The European Central Bank is expected to remain steady this week, with the market focusing on whether the interest rate cut cycle has ended

According to the Zhitong Finance APP, the European Central Bank (ECB) is expected to keep interest rates unchanged for the second consecutive time at Thursday's policy meeting. Meanwhile, investors are closely watching whether the ECB will hint that the rate-cutting cycle has ended.

ECB President Christine Lagarde's hawkish statements in July weakened market expectations for further easing actions by the ECB. Subsequently, a trade agreement between the U.S. and the EU, along with robust economic performance in the Eurozone, means there is currently little need for the ECB to take action. Guy Miller, Chief Market Strategist at Zurich Insurance Group, stated, "ECB policymakers are currently quite comfortable with holding steady."

Here are five key questions the market is focused on.

1. What will the ECB do this Thursday?

The ECB is expected to keep the deposit facility rate unchanged at 2% on Thursday. Since the last meeting, Eurozone inflation has been slightly above expectations, and the first-quarter economic growth was twice that predicted by the ECB, while the trade agreement with the U.S. has reduced uncertainty. Therefore, policymakers have no reason to cut rates now or to hint at the next steps. Simon Wells, Chief European Economist at HSBC, stated, "They want to deliberately maintain opacity in future rate decisions. So overall, this is the outcome we will get."

2. Has the U.S.-EU trade agreement changed the economic outlook?

At first glance, the impact is minimal. Lagarde stated that the EU's 15% tariff agreement is not far from the 10% baseline expectation previously set by the ECB. Some economists warn that the impact of tariffs on the economy remains uncertain and will gradually emerge in the coming months, with further escalation of tariffs also posing a risk. Carsten Brzeski, Global Head of Macro at ING, stated, "My level of criticism or skepticism about this agreement may be stronger than the ECB's stance at the meeting."

3. Has the current rate-cutting cycle of the ECB ended?

Not necessarily. Several policymakers have not ruled out the possibility of further action, and there is still a divide within the ECB regarding whether inflation is above or below expectations. Economists surveyed believe that the ECB has ended its rate-cutting cycle. Traders, however, believe there is about a 70% chance of another rate cut by next summer.

Those who believe the rate cuts have ended point out that Lagarde has set a high bar for further action, stating that the economic outlook must deteriorate significantly for new moves to occur. Some even expect that, considering Germany's stimulus measures, the ECB's next action could be an interest rate hike However, if the economic impact of tariffs exceeds expectations, the bond market comes under pressure, the U.S. interest rate cuts boost the euro, and inflation remains lower, it may prompt the European Central Bank to restart interest rate cuts.

The European Central Bank expects inflation to be significantly below target levels next year. Additionally, the ECB's latest economic forecasts are also under close scrutiny. Economists generally expect slight upward adjustments in growth and inflation expectations for 2025, but there is greater divergence in views for next year.

4. What does political turmoil in France mean for the European Central Bank?

This is another source of uncertainty, but it is still too early to influence policymakers' thoughts.

The French government is trying to garner support for unpopular austerity measures, but it is likely to lose in the confidence vote on Monday. If the market becomes more tense, attention may shift back to whether the ECB will use its "Transmission Protection Instrument (TPI)" to purchase bonds. This tool is designed to support countries facing debt pressure due to reasons beyond their control, but it is difficult to say whether France qualifies.

Analysts say that early elections could widen the spread between French and German 10-year government bond yields from the current 76 basis points to about 90 basis points. However, similar spread levels last year did not prompt the ECB to activate the TPI, nor was there a serious spillover to other countries, so the likelihood of ECB action remains low.

5. Is the European Central Bank concerned about central bank independence?

Undoubtedly. Lagarde stated that if the U.S. government attempts to remove Federal Reserve Chairman Powell or Governor Cook, it would pose a "very serious threat" to the global economy.

Policymakers and economists warn that if the Federal Reserve succumbs to the Trump administration's calls for interest rate cuts, it could fuel inflation, while a tighter financial environment would transmit to the eurozone, thereby pushing up the euro. Guy Miller, Chief Market Strategist at Zurich Insurance Group, stated: "This is about financial stability. Without an independent Federal Reserve, that is the real risk."