Hopes rise for rate cuts; U.S. consumers gloomy

By Claudia Parsons

NEW YORK (Reuters) - Hopes rose on Tuesday that the United States, Japan and Europe will cut interest rates to ease the pain of the financial crisis, and battered U.S. stocks surged 10 percent despite gloomy news on the economy.

U.S. consumer confidence plunged to a record low in October amid signs the economy is sliding into a deep recession, threatening to pull the rest of the world with it.

The Nikkei business daily said the Bank of Japan was considering a 25 basis-point interest rate cut to underpin the economy, pushing the yen down in its biggest one-day decline against the dollar in more than 30 years.

A source informed on the matter told Reuters the BoJ would consider cutting rates at its next policy meeting on Friday but will watch market conditions before making a final decision.

A quarter point cut to 0.25 percent could curb the recent surge in the value of the yen, which in turn helped hammer Japanese stock markets. Nikkei futures jumped 14 percent after the report.

In the United States, the consensus among Federal Reserve watchers is for a half-point cut in rates on Wednesday to 1 percent, the lowest level since June 2004. It has already cut the benchmark federal funds rate to 1.5 percent from 5.25 percent over the past 13 months.

The ECB and Bank of England are expected to cut rates on November 6. The moves would follow a coordinated round of monetary easing from major central banks earlier this month.

Lower interest rates could bolster corporate profits by cutting the cost of borrowing for firms hit by the slowdown.

The Dow and the S&P 500 ended up more than 10 percent, a welcome relief after recent heavy losses.

Japanese stocks had closed 6.4 percent higher on Tuesday after hitting a 26-year low and European stocks ended up 2 percent.

"We've had a heck of a day today," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "The market is expecting a rate cut here tomorrow and we had the news that the Bank of Japan is going to cut rates to weaken the yen -- the strength of the yen has been causing unexpected problems for global markets," Kenny said.

"And we've had only a handful of up-days in October -- sellers are running out of steam."

A drop in closely watched rates on loans between banks was another hopeful sign, showing central bank efforts to ease the credit crunch are making progress.

In Europe, Iceland hiked interest rates massively in a desperate attempt to defend its currency. The move will help secure aid from the International Monetary Fund, which is also crafting plans for Hungary and Ukraine.

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