Europe set to slash rates as gloom deepens

By Tomasz Janowski and Ralph Boulton

SINGAPORE/LONDON (Reuters) - Europe's top central banks were under pressure to slash borrowing costs by a record margin on Thursday as part of global efforts to stimulate trade and commerce and ward off deep recession.

Markets looked also to U.S. President-elect Barack Obama to name key members of an economic team that must tackle a crisis that originated in the U.S. housing market before enveloping the financial system and toppling major banking institutions.

The European Central Bank and the Bank of England had been expected to cut interest rates by 50 basis points but markets are now pricing in bigger cuts after more evidence the world economy is slowing.

News of bigger-than-expected job losses in the United States, a sharp contraction in the world services sector, steep house price declines and a manufacturing retreat in Britain all underscored the global economic gloom.

Toyota Motor Corp, the world's biggest automaker, slashed its annual operating profit forecast by more than half and its shares tumbled over 10 percent, making it the latest casualty in an industry hit hard by the slump. Goldman Sachs Group Inc was laying off 3,200 employees this week, according to sources familiar with the situation.

Markets buckled under the weight of the grim data, with stocks in Tokyo falling 6.5 percent and elsewhere in Asia by more than 7 percent.

European stocks opened down 3 percent with Britain's FTSE 100 index off by two percent and Germany's DAX down by 2.5 percent. Russia's MICEX tumbled eight percent, prompting the bourse to announce that trade would be suspended for an hour.

"After the world rally on the day of the presidential election, investors have now shifted their focus to how fast, and how well the new administration will address the current economic issues," said Yoo Soo-min, analyst at Hyundai Securities.

Oil prices fell below $65 a barrel, reflecting expectations a global recession will severely undercut demand.

The U.S. Federal Reserve and central banks in Japan and China cut rates last week to shield their economies from the crisis that began when a U.S. housing boom soured 15 months ago.

Australia kicked off this week's round with a hefty 75 basis point cut.

SWIFT ACTION

Obama's landslide win on Tuesday along with the Democrats' tighter grip on Congress, raised hopes of a speedier injection of billions of dollars aimed at shoring up the struggling economy.

But the first black U.S. president has to wait until January 20 to move into the White House and prove his mettle in tackling the worst crisis since the 1930s.

Timothy Geithner, president of the Federal Reserve Bank of New York, former Treasury Secretary Lawrence Summers and former Fed Chairman Paul Volcker are among those mooted for the Treasury post. Obama may announce his pick on Thursday.

For now, the onus is on the current administration and central banks and governments elsewhere to act.

The ECB, staring at the first euro zone-wide recession since its inception in 1999, is seen certain to cut its benchmark rate by half a point to a two-year low of 3.25 percent. But interest rate traders are pricing in a 75 basis point cut.

A half-point reduction would match the October 8 emergency cut made in unison with the Fed and other major central banks. A larger reduction would be the ECB's biggest ever.

There is also mounting pressure on the Bank of England's Monetary Policy Committee to act aggressively with financial markets factoring in a 75 basis point cut. Some economists are even calling for a full percentage point cut or more, which would be the MPC's most dramatic move since it was set up 11 years ago.

"I would vote for a 150 basis points cut," the Daily Telegraph quoted Willem Buiter, a former Bank of England policymaker and professor at the London School of Economics, as saying.

"I don't think they're going to do that but I think they're likely to do more than 50 basis points and possibly even 100."

JOB LOSSES

Underscoring the urgent need for decisive action, a survey showed on Wednesday global services activity last month hit its lowest since 2001.

British manufacturing suffered its longest decline since 1980 and in the United States a private jobs report pointed to a bleak non-farm payrolls report on Friday.

In another sign that no corner of the world was spared the pain, the International Monetary Fund approved a hefty $16.5 billion loan for Ukraine.

While investors and leaders looked to Obama to act swiftly to revive the world's biggest economy, some commentators voiced concern that his campaign pledge to protect U.S. jobs could usher in a protectionist era in U.S. trade policy.

A senior official said President George W. Bush would urge leaders of the world's 20 major economies at a November 15 meeting not to use the global economic crisis as an excuse to erect trade barriers and stifle markets.

Pacific Rim officials, who gathered in Peru ahead of that meeting, called for large emerging economies such as China and Brazil to have a greater say in running the world's financial system.

"Our projection for next year, 2009, is for 100 percent of global economic growth to come from emerging market nations," said John Lipsky, the IMF's first deputy managing director.

Amid the economic gloom there were some pockets of resilience. Australia reported a surprising rise in jobs in October, the month when world stock markets suffered their worst ever battering.

(Editing by Neil Fullick and Jason Neely)

(Reporting by Reuters bureaus worldwide)