Two European central banks expected to cut interest rates

— -- Two foreign central banks are expected to cut interest rates Thursday, responding to signs of accelerating deterioration in key overseas economies.

Both the Bank of England and the European Central Bank, which raised interest rates as recently as July, are considered likely to shelve inflation fears and cut benchmark lending rates by half a percentage point. That would follow coordinated rate cuts Oct. 8 by six central banks, including the Federal Reserve.

"We're about to see a definitive shift in policy," says Stephen Jen, currency strategist for Morgan Stanley in London, who predicts a series of rate cuts by both banks.

The Fed already has dropped rates to 1%. But the ECB, currently at 3.75%, and the Bank of England, at 4.5%, still have plenty of room to cut.

Jen notes that the ECB reduced rates to 2% in 2002 when the economy wasn't as impaired as it is today. Now, with credit channels still not operating normally, deeper rate cuts may be warranted. "The situation may be worse this time around," he says.

The aim is to stir sluggish economies by making credit more affordable for struggling businesses. In recent days, the U.K. and continental economies both showed clear signs of stalling. U.K. manufacturing output fell in September for the seventh month in a row, the longest uninterrupted decline since 1980. Retail sales in countries using the euro fell 1.6% in the year ended in September and have fallen for four consecutive months.

The rapid weakening has eased, though not eliminated, central bankers' fear of stoking inflation with rate cuts. Even as the U.K. economy slowed in September, for example, inflation hit a worrying 5.2%. Likewise, in Germany, the metal workers union is seeking an 8% annual pay increase, which could cause the ECB to shy away from goosing the economy, economist Carl Weinberg of High Frequency Economics told clients Wednesday.

Others say global markets have priced in further rate cuts and would react badly to a stand-pat strategy. "This is no time to surprise the market. … I don't think the central bankers will disappoint," says Greg Salvaggio, senior vice president at Tempus Consulting in Washington, D.C.

Lower rates, historically a boost for stocks, also could spur investor demand and help reverse recent bear markets, says Jen.