The Bank of England shocked markets with a massive 150 basis point rate cut Thursday, followed by a 50 bps cut from the European Central Bank. Analysts predict that there’s more rate relief to come.

TD Economics notes that consensus forecasts for the Bank of England decision was for 50 bps, and the high forecast was 100 bps. But, it says, “The Monetary Policy Council wanted to decisively get ahead of the recessionary wave that is now clearly overtaking the economy.”

“Today’s rate decision will not impact the path of the economy until the spring, but it does greatly diminish the growing risks that the current recession could prove deeper and longer than the last 1990-91 U.K. recession,” it says.

However, it still sees rates going lower from here. “You do not slash rates to get ahead of the curve only to sit on your hands and watch it overtake you once again,” TD says. “The market seems to be a bit too complacent in now expecting less than a percentage point in cuts over the next six months.”

It expects the Bank of England will cut a further 50 bps in December, but with a very slight bias towards more. “Longer term, we expect the bottom to be at 1.50% or less over the next 12 months, with downside risks to that requiring further aggressive policy easing in the near term,” it says.

Global Insight says it also now believes that interest rates will come down to 1.50% in 2009. “Specifically, we are now forecasting a further 50-basis-point cut to 2.50% in December and project interest rates to fall to 1.50% by mid-2009. Furthermore, we would not rule out interest rates coming down even further next year. The very real danger of extended, deep recession leading to inflation substantially undershooting its 2.0% target level over the medium term is now the main problem facing the Bank of England,” it says.

After the BoE’s decision, the ECB just cutting rates by 50 bps “felt very much like a disappointment” TD adds. It expects another rate cut at its next meeting too, with rates eventually bottoming at around 1.75%-2.00%.

IE