Rising upside risks to price stability and growing concerns over second-round inflation effects were cited as the main reasons behind the ECB's decision.

"After today's 25bp policy rate hike, uncertainty surrounding the ECB's future policy path has not abated, since the ECB Council - as always - did not pre-commit to any future interest rate decisions," economists at West LB wrote in a research note.

However, despite this uncertainty, further policy tightening is not anticipated due to slowing growth in the euro zone. In light of this economic downturn, the West LB economists suggested that the ECB could begin lowering rates by 2009.

Supporting the argument that July's rate hike was a one-off, the West LB research note highlighted that "heightened alertness" was not heard during Thursday's press conference and that ECB President Jean-Claude Trichet fell back to the phrase "we will monitor all developments very closely".

"We interpret this as a signal that the ECB is not planning to deliver another hike on August 7," the note said.

However, pointing to the fact that the ECB will have a press conference following its rate decision meeting in August - the council normally breaks for the summer - the research note acknowledged the possibility of the central bank wanting to prepare the markets for a rate increase in September. Although, such an action would depend on future economic data, the note added.

ING Wholesale Banking economist Carsten Brzeski agreed with the suggestion that further rate increases were not looming and pointed to the excerpt, "the monetary policy stance following today's decision will contribute to achieving our objective" as a possible indication that the central bank has resumed its "wait-and-see" position.

However, with Trichet saying on Thursday that "we are never pre-committed" and "we will do what is necessary", Brzeski said the ECB hasn't totally dispelled the likelihood of future policy tightening.

"After today's meeting, we feel confirmed in our view that the ECB is not about to start a new tightening cycle," Brzeski said, adding that, while there is only one needle in the central bank's compass, the ECB is not oblivious to the economic slowdown.

"Today's rate hike should have been a one-off to strengthen the ECB's image as an inflation fighting knight," he said.

During Trichet's press conference, the euro depreciated against both the dollar and the pound sterling, dropping to 1.575 from $1.5897 USD, or to £0.794 from £0.7993.

In fixed income, the yield on the two-year bond dipped from 4.7% to 4.433% before rebounding slightly to 4.526% when Trichet finished speaking. The yield on the German Bund followed a similar path, slipping from 4.65% to 4.58% before recovering to 4.62% toward the end of the press conference, while three-month Euribor yields declined to 5.04% from 5.135%.

By Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

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