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UPDATE: Britain's, Euro-zone's Central Banks Seen On Opposite Tacks

By Steve Goldstein

LONDON (Dow Jones) -- The central banks of Britain and of the euro-zone may indicate Thursday they are heading in opposite directions, as the Bank of England may cut interest rates for the second month in a row, while the European Central Bank may try to lay the groundwork for a rate hike later in the year.

The fireworks kick off at 7 a.m. Eastern, when the Bank of England will announce whether to move rates from the current level 5.5%.

The central bank cut its key rate for the first time in over two years in December when data released just ahead of the decision showed a sharp slowdown in the country's dominant services sector.

Last-minute news could also be enough to sway the bank's Monetary Policy Committee this time around after iconic department store operator Marks & Spencer revealed its worst quarterly performance in over two years.

That follows disappointing updates by a slew of British retailers, including PC World owner DSG International and clothing retailer Next .

"Fears that consumer and business confidence are set to decline further have been reinforced by worsening fears over U.S. prospects and by worrying new evidence that the Christmas sales have been very disappointing for many U.K. retailers," said David Kern, economic adviser to the British Chambers of Commerce.

"A small cut in interest rates on Thursday will reduce the risk that emergency measures would be needed later in the year," he added.

But there is also a strong argument for pausing, as inter-bank lending rates have fallen back to their lowest level since the credit market crisis began in August.

Weighing against an immediate cut, on the other hand, are a pull-back in interbank lending rates from recent highs and a fall in sterling back below the $2 level.

The weaker pound could add to inflationary pressures -- already a worry for the central bank -- by raising the cost of imports.

The December cut to 5.5% was a pre-emptive move by the central bank to counter risks from the market turmoil, said Lloyds TSB economist Kenneth Broux.

"The fact that financial market turmoil has not worsened means that downside risks to the economy have not intensified since the bank cut rates in December," he said.

Other data has also suggested a pause this month, including a stronger-than-expected reading of the services sector purchasing managers' index.

Although January's decision will be tight, economists are almost unanimous in expecting another cut soon. If it doesn't come Thursday, the next cut will likely come in February, most agree, as the MPC would be able to combine the announcement with its latest forecasts for growth and inflation.

ECB setting up for a hike

The European Central Bank -- now the central bank for 15 countries after Malta and Cyprus joined the euro-zone -- may try to prepare markets for a hike.

Economist widely expect no change from the current level of 4% when the bank announces its latest decision at 7:45 a.m. Eastern.

But the accompanying press conference, at 8:30 a.m., the ECB is expected to adopt a hawkish tone, especially with euro-zone inflation running at 3.1% in November, well above the bank's target of "close to, but below, 2%."

Some member of the voting governing council object to the ECB staff's forecast of inflation below 2% next year.

"For inflation to fall below 2% in 2009, the ECB staff assumes no or very limited second-round effects along with wage moderation and a fall in the profit margin. These assumptions are questionable," said Niels-Henrik Bjorn, an economist at Danske Bank.

"Thus, (President Jean-Claude) Trichet is likely to remain hawkish and most likely at the second highest state of emergency before tightening policy -- that is, the ECB will monitor prices 'very' closely and 'stand ready to counter upside risks to price stability.'"

Trichet said during the last meeting that some members voted for a hike. The ECB doesn't provide minutes of its meetings, so it's unclear how many wanted to raise rates.

Nonetheless, surveys of economic activity are pointing to a slowing of the European economy, limiting the ability of the central bank to hike rates.

Julian Callow, the chief European economist for Barclays Capital, predicted the Frankfurt-based central bank may cut rates as early as the second quarter.

"While the ECB will doubtless continue to emphasize both its independence and the independence of the euro area economy from the U.S., the fact remains that the euro area economy continues to be very sensitive to the global GDP cycle," he said.