Jan. 22 (Bloomberg) -- The European Central Bank and the Bank of England may have to follow the Federal Reserve and cut interest rates as the risk of a U.S. recession threatens to drag down a global expansion, economists said.

``From a European and a U.K. perspective, the Fed cut adds to the risk of more and quicker rate cuts,'' said Amit Kara, an economist at UBS AG in London. Kara, a former economist at the U.K. central bank, predicts four cuts from the Bank of England this year and two by the ECB.

The Fed today lowered its benchmark rate in an emergency move for the first time since 2001 after global stock markets tumbled amid signs the world's largest economy is sliding into recession. The move spurred a rally in European stocks, though failed to stem a decline in U.S. indexes.

The widening interest-rate gap between the U.S. and Europe may spur gains in the euro, worsening the outlook for an economy already showing signs of a slowdown by hobbling exports. German investor confidence dropped to the lowest since 1992 in January and European manufacturing growth slowed in December.

``This market has been calling for help,'' said Alberto Espelosin, who helps to manage about $12 billion at Zaragoza, Spain-based Ibercaja Gestion. ``The ECB should follow suit.''

The Bank of Canada, in a scheduled meeting, lowered its main rate by a quarter point today to 4 percent and signaled it will act again to shield Canada from the U.S. slowdown.

Yields Fall

Investors are increasing bets Europe's two major central banks will cut borrowing costs, interest-rate futures trading shows. The ECB's benchmark rate is currently 4 percent, while the Bank of England's 5.5 percent is the highest among the Group of Seven industrial nations.

The yield on the June ECB contract fell to 3.80 percent today from yesterday's close of 3.94 percent. On the June U.K. contract, the yield fell 3 basis points to 4.89 percent.

The ECB and the U.K. central bank refused to give away their intentions. The Bank of England said it has no plans to bring forward the next meeting of the Monetary Policy Committee, which is scheduled for Feb. 7. ECB council members Juergen Stark and Yves Mersch declined to comment on the Fed's decision.

Bank of England Governor Mervyn King today said inflation may match the fastest pace in at least a decade this year and require an explanation to the U.K. Treasury, a sign that policy makers have limited scope to cut interest rates.

Slower Growth

``Inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the chancellor,'' King said in a speech. ``To put it bluntly, this year we are probably facing a period of above-target inflation and a marked slowing in growth.''

The Swiss National Bank declined to comment, as did spokespeople for the central banks of Norway and Sweden.

The euro, which touched a record $1.4967 on Jan. 23, rose 1.1 percent to $1.4613 at 6:33 p.m. Frankfurt time after the Fed's announcement. The pound climbed 0.9 percent to $1.9611.

``If it becomes clear that this is merely a temporary fix, and the situation deteriorates further, then the ECB will be forced to act,'' said Ken Wattret, an economist at BNP Paribas SA in London.

While David Brown, chief European economist at Bear Stearns Cos. in London, predicted the Bank of England will cut its rate next month and the ECB will do so in the second quarter, he ruled out either following the Fed in reducing rates outside their normally scheduled meetings, as they did in September 2001.

Six-Year High

``It's not their style,'' said Brown. ``European central banks tend to move by the calendar.''

European inflation at a six-year high of 3.1 percent, breaching the ECB target of just below 2 percent, is limiting policy makers' room for maneuver. President Jean-Claude Trichet said Jan. 10 that the bank is ready to act ``preemptively'' to raise rates to contain consumer prices.

Since then, evidence has mounted that the European economy may be starting to become infected by the U.S. slump. Industrial production shrank in November and banks told the ECB this month that they will tighten credit in the next three months.

``Conditions have changed dramatically of late and even from an ECB perspective, this is not the time to worry about inflation,'' said Audrey Childe-Freeman, an economist at CIBC World Markets in London.

Some members of the ECB's governing council have already softened their tone. Luxembourg's Yves Mersch said in a Jan. 15 interview that the bank should exercise caution amid ``downside risks to economic activity.'' Germany's Axel Weber cautioned the same day not to ``over-dramatize'' a pick-up in inflation.

Housing Slump

Holger Schmieding, Bank of America Corp.'s chief European economist, said the economy remains strong enough to cope with the current ECB rate.

``Economic data would have to be much, much weaker to trigger a rate cut at the ECB,'' said Schmieding, who is based in London.

U.K. policy makers cut their main rate by a quarter-point in December to spur economic growth, and economists already expected a similar reduction next month before the Fed shifted today.

Growth in the U.K. is showing signs of slowing as a surge in credit costs curbs consumer spending and brings a decade-long housing boom to a halt. The economy probably expanded 0.5 percent in the fourth quarter, the slowest in 2 1/2 years, according to the median of 35 forecasts in a Bloomberg survey.

Richard Lambert, a former policy maker at the bank who now runs the Confederation of British Industry, said the bank ``can justify a cut in the near-term.''

Brown at Bear Stearns said both the Bank of England and ECB should be biased towards cutting sooner rather than later because delay may mean they only have to reduce their key rates by much more in the future.

``The longer they leave it, the more they'll have to do,'' he said.

To contact the reporters on this story: John Fraher in Davos, Switzerland at jfraher@bloomberg.net; Simon Kennedy in Davos, Switzerland at Skennedy4@bloomberg.net.

Last Updated: January 22, 2008 15:48 EST