The European Central Bank hiked rates 25 basis points, and the Bank of England left its rates unchanged today. Both decisions were expected, but the future direction of European monetary policy is less clear.

At today’s meeting the Governing Council of the ECB raised the minimum bid rate on the main refinancing operations of the Eurosystem by 25 bps to 3.5%, the interest rate on the marginal lending facility will be increased by 25 bps to 4.5%, and the interest rate on the deposit facility will be increased by 25 bps to 2.5%.

CIBC World Markets calls the move “very predictable”, adding that this latest hike takes the cumulative tightening to 150 bps since the beginning of the cycle (last December).

“The ECB President Trichet’s post-Meeting press conference remarks bode well with our view that today’s rate hike was not the last one in the current cycle: the tightening psychology remains very much in place at the ECB. The question that is open to debate is when will we see the next policy action as February has basically been ruled out by Mr Trichet,” CIBC says.

The ECB’s staff growth projections were revised higher for 2006, and revised its inflation forecasts down due to lower oil prices. CIBC notes that the risks to the growth outlook are said to be to the ‘downside’ while inflation risks are still said to be to the upside. “Interestingly, in the Q&A session, Trichet highlighted the importance of delivering price stability when asked about the lower growth/higher inflation risk trade-off. Otherwise, Trichet reiterated the need for continued fiscal discipline with the Eurozone – deja vu – and he also strongly emphasised the need for contained wage growth,” it says.

“Overall, those hoping that today could have marked a peak in the ECB’s rate normalisation process could be disappointed,” CIBC concludes. “It seems clear that further rate hikes are in the pipeline but we may have to wait until March to see the next policy action.”

Meanwhile, the Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 5%. CIBC says that this decision was expected, too.

“As usual when a policy decision is not controversial, we have no immediate explanation available yet but the nature of today’s policy debates will be unveiled in the minutes, due in a fortnight,” it says. “After having just hiked interest rates by 25 bps at the November meeting, the case to wait and see was compelling today so expect this decision to have been taken unanimously, with a 9-0 vote likely to emerge.”

“Looking ahead, the debate remains relatively open though, with the outcome of the January pay rounds likely to prove crucial in determining whether we see one last rate hike in the current cycle. We are still in the 5% peak camp but it is a close call and the market may not give up on its more hawkish stance yet,” CIBC concludes.