Are we done already? Five questions for markets ahead of ECB

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.

4/ What does France's political turmoil mean for the ECB?

It's another source of uncertainty, but too early to influence policymakers' thinking.

France's government is likely to lose a confidence vote on Monday as it tries to gather support for unpopular belt-tightening measures.

If markets become more stressed, there may be a renewed focus on whether the ECB might buy bonds using its Transmission Protection Instrument scheme designed to support countries whose debt comes under pressure through no fault of their own - which is hard to say for France.

A snap election could widen the French/German 10-year bond yield spread to around 90 basis points from 76 now, analysts say.

But similar levels last year did not see the ECB deploy TPI and there was no major contagion to other countries that might make it more likely to act.

5/ Is the ECB worried about central bank independence?

For sure. The U.S. administration attempting to remove Federal Reserve chief Jerome Powell or governor Lisa Cook would pose a "very serious danger" to the global economy, Lagarde says.

The Fed yielding to demands for lower rates could stoke inflation, and tighter financial conditions spilling over to the euro zone, and push the euro even higher, policymakers and economists warn. 

"It's about financial stability; that's what would be at risk without an independent Fed," said Zurich's Miller.     

(Reporting by Yoruk Bahceli in London and Stefano Rebaudo in Milan; editing by Dhara Ranasinghe and Hugh Lawson)