As expected, the European Central Bank, raised rates by 25 basis points today, but economists say that comments from ECB president Jean-Claude Trichet indicate that future hikes will likely be slow in coming.

At today’s meeting the Governing Council of the ECB decided to increase the minimum bid rate on the main refinancing operations of the Eurosystem by 25 bps to 2.25%; the interest rate on the marginal lending facility will also be increased by 25 bps to 3.25%, effective December 6; and, the interest rate on the deposit facility will be increased by 25 bps to 1.25%, also effective December 6.

Stewart Hall, fixed income dealer with HSBC Securities (Canada) Inc., notes that, “This marks the first rate hike since the fall of 2000.”

“The job for the market is pricing future expectations for the ECB. A pendulum never swings to the middle and neither does a market,” Hall says. “Trichet’s post-meeting comments suggesting sporadic rate hikes over 2006 vs. “measured” and that is disappointing the euro market which is swinging back toward the lows on the week vs. dollars.”

“The ECB President Trichet did say it very clearly: ‘the ECB has not decided ex ante to engage into a series of rate hikes’. This confirms that we should not see additional rate hikes for a little while longer, but the mere fact that Mr Trichet reiterated that close monitoring [with respect to] upside risks to price stability is warranted suggests that future rate hikes cannot be ruled out altogether,” notes CIBC World Markets. “It will not be a 25 bps per meeting (a la Fed) approach though.”

“The ECB President said that the rate decision was a unanimous one but he also acknowledged different degrees of hawkishness in the Council – with some tempted to wait longer before hiking while others ‘could have seen rate hikes greater than 25 bps’,” CIBC reports. “The ‘not the beginning of a series of rate hikes’ reference and the omission of ‘strong vigilance’ will be seen as fairly dovish; a relief for bonds/euro; but this is not surprising: this was not the beginning of an aggressive cycle anyway.”

“The language contains the elements with which the market has become familiar, but lacking the clarity with which the current rate hike was telegraphed two weeks ago. And that is what the hawks would have been looking for, an arguably would have been the signal to rally euro,” comments Hall. “Instead, the gist of the comments support sporadic rate hikes (dovish scenario) parsed out over 2006. And that just can’t compete with the clarity of policy out of the Fed. In turn, the market is expressing this view in a weaker Euro profile. The futures strip suggests 50bps although the market is pricing ECB policy less aggressively.”