Both the Bank of England and the European Central Bank left rates unchanged today, as markets expected. Economists suggest that rate hikes remain a possibility from the ECB, but cuts may be in the cards from the BoE.

At today’s ECB meeting in Vienna, the Governing Council of the ECB decided that the minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.00%, 5.00% and 3.00% respectively.

CIBC World Markets says that while the decision to leave rates unchanged was much as expected, the ECB is leaving the rate hike option in place, “with inflation risks still said to be to the upside and ‘monetary policy ready to counter upside risks to price stability’.”

It adds that leaving open the possibility of hikes is, “probably the best strategy given that it is still a touch premature to conclude on the extent to which the credit crunch is affecting the Eurozone growth/inflation outlook. We believe that this option may never be exercised, but it is there, so that the ECB does not have to abandon its previous base scenario too quickly. In the meantime, the ECB can wait and see on the monetary policy front.”

Also, the Bank of England’s Monetary Policy Committee voted to maintain the official Bank Rate paid on commercial bank reserves at 5.75% today.

“This was the third consecutive month of a wait and see approach from the MPC and there was no accompanying statement, so we have to wait for today’s minutes (due in a fortnight) for a flavour on the Bank’s current thinking,” CIBC says. “In the current context and bearing in mind last month’s policy statement, it is clear that the MPC is likely to have moved away from a tightening psychology to an easing psychology.”

“A no-change policy outcome was widely expected today but given the highly unusual market environment and the BoE’s past policy surprises, a rate cut scenario was not totally ruled out,” CIBC says. “Rate cuts are likely to be back on the agenda soon though as the discrepancies between the repo rate and money market rates cannot persist for much longer without more serious consequences on the growth/inflation outlook and in turn, on the Bank’s credibility.”