The European Central Bank delivered on rate hike expectations today, but economists say that it now appears to be backing off its hawkish stance a bit. Indeed, economists anticipate that most central bankers will be on hold for the balance of the year.

TD Economics notes that in the press conference that followed today’s 25 basis point rate hike by the ECB, the bank’s president Jean-Claude Trichet explained that the move will serve to “prevent broadly based second-round effects and to counteract increasing risks to price stability over the medium term.”

“While one rate hike will have very little effect on inflation itself, the ECB hopes this warning shot will show that it is serious about its mandate to keep the pace of inflation below but close to 2% in the medium term,” it says.

“With inflation accelerating more than expected in June, the rate path for the rest of 2008 is much cloudier,” says BMO Capital Markets. “Some ECB officials painted a one-and-done scenario, but the ECB has inflation tunnel vision and sees signs that second round effects could be brewing in the form of rising services prices and wage demands, both of which point to potential further rate hikes. But for now, Trichet said that they have “no bias” for monetary policy, suggesting another move is not imminent.”

TD adds that the ECB did not signal any imminent change in interest rates in the coming months. That said, it allows that this does not rule out another rate hike this year, particularly if oil prices continue to climb.

“Our expectation is that oil prices could fall about 25% by year-end, which would help bring Eurozone inflation close to 2% by the end of 2008. However, if oil prices were to average $140pb through the first quarter of 2009, Eurozone inflation would likely peak near 4.3% in August but fall to around 2.5% by March 2009 – an outcome we think would be acceptable to the ECB given concerns economic growth will be much slower in the second half of this year,” it says.

“Oil would have to average more than $140pb in the coming months or rising core inflation would have to push headline inflation beyond that expected August peak in order for us to expect another ECB hike,” TD adds. “We continue to expect that the ECB will remain at 4.25% for the rest of 2008 and will deliver cuts in March and May of 2009 to bring interest rates down to 3.75%.”

Elsewhere, BMO says that, after surprising markets with no move in June, it expects the Bank of Canada to remain sidelined for the rest of 2008, as upward inflation risk balances slowing growth.

“The Canadian dollar will likely continue to trade near parity through 2008. But, as global growth slows, softening commodity prices will likely weigh on the loonie,” it predicts.

Also, BMO says, “A renewed downturn in the economic data combined with increased upside risks to inflation should keep the Fed sidelined in August and into early 2009.”

And, it maintains that the Bank of England is data dependent, and likely on hold. “The economy is slowing sharply, but further cuts aren’t likely until inflation worries ease,” it says.

Finally, BMO suggests that the Bank of Japan remains on pause, but is concerned about “heightened worldwide” inflation risk. “The Bank’s stance is unlikely to change as growth could weaken significantly in [the second half].”