Jan Lambregts, Senior Economist of the Asian Region at Rabobank says that the Fed may go in for only one more 25 bps rate hike. He adds that the Fed's next week move will depend on non-farm payrolls.

Lambregts expects the European Central Bank, ECB, to maintain a neutral 3.5% rate and says that Bank of England's rate hike has come as a surprise.

He further states that the ECB may tighten rates in October and early December.

What's happening in Europe, how do you read that and how much more is there to go now, because we have just been focused on the US and Japan?
Lambregts: If one is looking at the ECB, there was no surprise yesterday that they hiked rates and they did so by 25%, pretty much obliging market expectations here. If one is looking at the statement, which was a more interesting part, in the press conference that Mr Jean-Claude Trichet, the ECB President gave, he didn't use the word vigilance. That is a clear signal that at the end of August, when the ECB meets again, they do not intend to hike rates. He did say that they are very closely monitoring the situation and if the ECB's assumptions about the economy and inflation is proved correct, a further gradual removal of that loose Monetary Policy would be warranted. In other words, the ECB intends to tighten rates further, not at the end of this month but later on in the year.

We are actually looking for them to tighten two more times that is in early October, or early December. I think that is the point at which the ECB is likely to take a long break, a long pause. One reason is because we estimated a neutral rate, which is the rate at which the economy is needed to stimulate it nor drag it as opposed by interest rates, when it is around 3.5%. The second reason is that we feel that there will be some head wins for growth, next year in the Euro zone.

You wouldn't say that either for the ECB or even for the Bank of England, BOE, these Central banks have gone into a restrictive mode quite yet?
Lambregts: I would not say for the ECB, like I said we estimate that a neutral rate is around about 3.5% and that is what we hear from the ECB policy makers, ECB officials. At any given moment, they are keen to tell us that they still think that there is a lot of policy accommodation left. On the UK side of the equation, it is not so clear-cut. I do feel that the Bank of England is moving further into a restrictive territory, they surprised the market by moving yesterday and it shows that they are concerned about inflation; this is of course worldwide an issue. It was pretty surprising they moved already yesterday, as it was not even certain in the market that they would move next month. So that of course raises a prospect that they may do even more later on in the year, if inflation indeed doesn't subside.

What are you expecting from the FOMC next week?
Lambregts: It is going to be a close call. Mr Bernanke, when he joined as the Fed Chairman earlier this year, made it pretty clear that he would like the Fed to get out of the guidance business. He doesn't want the Fed to hold the market's hand. He was a bit forced to slowly build it off, but it looks like now well and truly, he is out of the guidance business, which makes it very hard to call the next one, because it is about even-odds and that's what the market is pricing in.
What we are seeing in the economy, is that the economy is slowing down and at the same time, inflationary pressure has been mounting.

That is making it really difficult for the Fed to decide what to do. Is it enough what they have done over the past couple of years or so? Is that still going to come through to keep inflation capped and if so, are they done right now?
We think that if they move, it will be only one more move, 25 bps next week. Actually, today one must keep an eye on non-farm payrolls because that could really be a tie-breaker if it is far-off from the median forecast, the median forecast is 145 K. Imagine if we get a reading of 250 K, then I would say that we ought to see a very good Federal move next week. Consequently if it is far-off the mark on the down side, say like 50K, probably the Fed will say, well the economy has slowed down enough now and they may pause.

Do you think most financial markets are ready to absorb that, one more price-hike or interest rate hike rather and then a pause?
Lambregts: If one is looking at what is really priced in the market, it is that the market has been swinging left and right. Right now, it is very even-odds, even a little below that. But really, non-farm payrolls can change that and it can be a tiebreaker today, if it produces an outline in terms of the forecast, compared to the median forecast. So expect, for example in the forex markets, also in the bond markets people are a bit reluctant to take on big positions, until they know the outcome of the non-farm payroll data.