Rates poised to tumble across the West

Economy: Bank of England and ECB under pressure to act if the Fed moves to avert threat of recession

Interest rates for almost 650 million people could tumble this week for the first time this year as three of the world's most important central banks set monetary policy within hours of each other.

The financial markets are braced for a "triple witching" that will see the Bank of England, the US Federal Reserve Board and the European Central Bank set interest rates.

Speculation is mounting that at least one of the three – the Fed – will cut rates in what could prove the most significant set of decisions this year.

A move by the Fed on Wednesday night would put pressure on the UK and eurozone institutions to follow suit the following day.

Speculation of a US rate cut has grown in the wake of a raft of poor economic numbers and consumer surveys.

On Friday a key survey of manufacturing in the US fell for the second month in a row, consumer income and spending eased back and the jobless total rose. Consumer confidence has plunged, durable orders have tumbled, while the latest GDP figures came in lower than hoped.

Fuel was added to the rumours by reports in two leading US newspapers, sourced to anonymous Fed officials, that the central bank would cut rates by the end of the year.

Ian Morris, US economist for HSBC, is among those who have changed their forecast to a half-point cut to take rates to just 1.25 per cent.

"The key reason for expecting [a half-point] is growing concerns about the threat of a credit crunch in the corporate bond market and the possibility of a sharp tightening of banks' lending attitudes for corporate loans," he said.

In a rare development, the Fed's decision will come midway through the Bank of England's two-day meeting that culminates in a decision at noon on Thursday.

This threatens to add further uncertainty to a decision that has already split the City. A poll of 32 analysts by Reuters showed 18 backing no change from 4.0 per cent and 14 opting for a quarter-point cut.

Oxford Economic Forecasting today forecasts the Bank will cut rates by the end of the year. It said the economy would grow just 1.5 per cent this year and 2.6 per cent in 2003. "The Bank is therefore expected to cut rates to 3.75 per cent soon," OEF director Adrian Cooper said.

Economists were also divided over the weight a Fed rate cut would have on the MPC. Stephen Lewis of Monument Securities, said the UK economy was in a different state from the US with inflation forecast to rise.

"Gordon Brown would welcome a rate cut ... but the MPC arrangements were established to put such temptations beyond the Chancellor's reach," he said.

Graham Turner at GfC Economics said a Fed cut would make it easier for the MPC to leave rates at 4 per cent. "If the Fed cuts next week it should give the stock market a lift, taking away one of the Bank's reasons for a cut," he said.

But John Butler, UK economist at HSBC, said a half-point cut by the Fed would be taken as a signal about the state of the US economy.

"At a time when the MPC are updating their inflation forecasts this could push them over the edge and make them willing to take a massive gamble with the domestic economy," he said.

"In that case, the MPC would probably cut by 25 basis points. Alternatively, if the Fed moved by just 25, then a move by the MPC is unlikely."

Few analysts expected the ECB to shift from its rate of 3.25 per cent because of its worries about soaring government deficits in the eurozone.