The European Central Bank left rates unchanged as expected on Thursday, with analysts saying the doves in the governing council had the upper hand.
Inflation has been running way above the ECB's comfort zone but the strength of the euro and the unclear outcome of the credit squeeze that has gripped the markets since August forced the bank to stay on hold.
"At the moment at least the hawks do not represent the majority in the council," Thorsten Polleit from Barclays Capital told "Power Lunch Europe."
"I think there is a majority among council members who are quite dovish," he added.
In his news conference, ECB President Jean-Claude Trichet signaled a hawkish stance, saying inflationary risks remain.
"Our monetary policy stands ready to counter price stability upside risks, as required by our mandate" Trichet said.
But he added that the situation in the markets showed that uncertainties remain.
"As regards financial markets, we will continue to pay close attention to developments to come," Trichet said.
About the euro's sharp rise against the dollar Trichet said it was "even clearer" that a strong dollar was in the interest of the U.S. and he reiterated that disorderly movements may harm economic growth.
"In the recent period I have observed moves that I would say were undoubtedly sharp," he added. "And I said already that brutal moves are never welcome."
He said the bank's predictions for economic growth have not changed since the previous meeting, but risks remain.
Asked about the impact of rising oil prices on growth Trichet said: "We are only qualifying the situation as not putting into question at this stage our baseline scenario of a growth at around potential, but we also said the risks are on the downside."
Rate Cut Seen Next Year
As the dollar plunged to new lows against the euro, raising rates -- despite inflation in the euro-zone running at 2.6 percent -- would pour salt over the wounds of exporters that have seen margins dwindling in the past year.
The dollar's fast decline since the Federal Reserve cut rates at its latest meeting has increased the objections from European officials and business leaders, even though nobody is now pointing fingers at the ECB.
"We are allergic to excessive volatility and are of the view that exchange rates should reflect economic fundamentals," Eurogroup chairman Jean-Claude Juncker said Tuesday.
The prospect of talk shifting from a rate rise to a rate cut in the euro zone seems still remote, but economists say that if the Federal Reserve continues to ease monetary policy, the ECB risks falling behind the curve.
Next year, the ECB may be whistling a different tune, Kaiser said.
"As a next step, we see a cut," he told "Worldwide Exchange."
Kaiser said oil and food price rises are temporary and the ECB's fears of inflationary pressures would be quelled.
"We reckon inflation would come down or would stay under control," he added.
Euro interbank offered rates for two to six-month maturites are well above historical averages, as the collapse in the U.S. subprime mortgage market and near closure of the short-term asset-backed commercial paper market has tightened credit conditions across U.S. and European interbank markets.
These rates have broadly eased in recent weeks since first exploding in August. But they're sufficiently high -- still around 60 basis points above the ECB's 4 percent refi rate -- to distort Euribor futures contract pricing, which in turn has indicated elevated ECB rate expectations.
Indeed, the tightening of credit through extraordinary high interbank borrowing costs has already had the same impact a conventional rate increase would have.
The more hawkish of ECB policymakers will point to the surprisingly high 2.6 percent flash estimate of October consumer price inflaition reported last week, oil at almost $100 a barrel and the danger that these developments could allow inflation expectations to get out of control.
But soft readings of euro zone purchasing manager indices, the potential export-dampening impact of the euro at record highs and the negative impact on consumer and business investment resulting from the credit crunch could all hit growth next year.
Germany, so far the most resilient of the euro zone's 13 economies faced with the steep currency appreciation, has started to show signs of exporters' fatigue, latest data show.
Manufacturing orders fell much more than expected in September and Tuesday, shares in luxury car maker BMW fell more than 4 percent after it missed expectations on profit, partly due to the euro's strength.
Petra von Kerssenbrock, a research analyst at Commerzbank, told "Squawk Box Europe" that apart from the automobile industry, machinery and engineering were also starting to feel the heat, but it was too early to tell how bad the euro has harmed them.
"There are first signs, but not within the breadth of the market in Germany," she said.
Bank of England on Hold
The Bank of England kept rates on hold Thursday at 5.75 percent, as inflation worries prevailed over fears of an economic slowdown.
But economists believe the BoE will cut rates early next year to offset the effects of a possible spillover of the credit crunch to the wider economy.
"We believe there will be scope for lower rates from the first quarter of 2008," ING Bank economist James Knightley wrote in a market note.
"With important surveys suggesting growth has peaked in the UK, sterling strength and a deteriorating US and Eurozone outlook hurting exporters and lead housing indicators pointing to a downturn, economic activity looks set to slow markedly in 2008," he added.