TD Economics is calling for substantial cuts to interest rates in the European Union and United Kingdom Thursday. It worries that the European Central Bank won’t do enough, but believes the Bank of England could be prepared to deliver a hefty cut.

In a special report published today, TD notes that with the European Central Bank and Bank of England policy rate meetings slated for Thursday, there are a number of conflicting signals as to what each should do. “The near-term risks seem to remain for a bit less easing than expected from the ECB and perhaps a bit more from the BoE,” it says.

The bank says that the ECB should be cutting by 50 bps, but it worries that it will not be that aggressive. “A quarter point cut (or less) on Thursday would increase the downside risks to our already pessimistic GDP forecasts and suggest inflation will decelerate even faster. Alternatively, a half point cut would be neutral for our forecasts, while it would take something more aggressive to suggest the ECB is prepared to act to stem when we believe will be a significant 2009 recession,” it says.

There is a very different situation for the Bank of England, TD observes. “Looking at the prospects for the BoE on Thursday, the forecasts are all over the map. 50 bps is fully priced in with odds for something bigger, and about 25% of forecasters are saying 75-100 bps of cuts will be delivered on Thursday,” it reports.

TD says that the UK economy needs a 75 bps cut, “anything less than this would increase the downside risks to these already dour economic forecasts,” it suggests.

IE