European shares slip by midday before ECB, BoE

LONDON (Reuters) - European stocks slipped by midday on Thursday as investors turned cautious ahead of two key central bank decisions widely expected to keep rates on hold, with weak financial shares offsetting gains in commodities.

The Bank of England is due to announce its rate decision at 7 a.m. EDT and the European Central Bank at 7:45 a.m. EDT.

All the economists polled by Reuters last month expected the BoE to keep rates at 5.75 percent and most saw the ECB holding at 4 percent, and the probability of rate increases has fallen drastically from surveys done before credit conditions worsened.

The FTSEurofirst 300 .FTEU3 index of top European shares was down 0.4 percent at 1,516.99 points after having risen as much as 0.8 percent in early trade. Benchmarks in Britain, Germany and France were down between 0.3 and 0.6 percent.

Bank stocks were the top negative weight on the European index, cancelling out the effect of gains in commodity stocks. Both Barclays (BARC.L) and Royal Bank of Scotland (RBS.L) dropped 2.6 percent.

Fortis Bank strategist Philippe Gijsels said he was expecting rates to go up in Europe, though the situation was "in the balance" as the ECB focused on price and financial market stability.

"We see one more hike, and then things to be steady for the rest of the year. The U.S. Federal Reserve has a growth target, of keeping the economy close to full employment, which is not a mandate of the ECB," he said.

Global stock markets have been roiled by tight credit market conditions stemming from a crisis in the U.S. market for subprime, or risky, mortgages that hit financial shares especially hard.

European shares are up around 3 percent so far this year, recovering after the U.S. Federal Reserve cut its discount rate on August 17, but are still down more than 6 percent from a 6-1/2 year peak hit in mid-July.

CONSOLIDATION, PRICES DRIVE COMMODITIES

Commodity stocks were the top-weighted gainers on the FTSEurofirst 300, with miner Rio Tinto (RIO.L) climbing steeply on persistent market talk that rival BHP Billiton (BLT.L) planned to ally with Brazil's CVRD (VALE5.SA) to make a bid.

Rio, whose stock rose 3.3 percent to lead percentage gainers in Europe, declined to comment. BHP gained 1.5 percent.

Other miners also advanced, with Anglo American (AAL.L) putting on 1.3 percent, Lonmin (LMI.L) 1.4 percent and Kazakhmys (KAZ.L) 0.6 percent.

Brent crude LCOc1 gained 35 cents to just under $75 a barrel, lifting index heavyweight oil shares. BP (BP.L) gained 0.5 percent, Total (TOTF.PA) 0.9 percent and Royal Dutch Shell (RDSa.L) 1.2 percent.

Overnight interbank lending rates, which have spiked sharply as banks hesitate to lend to each other due to uncertainty about subprime exposure, slipped before the ECB decision.

The overnight euro deposit rate dipped to 4 percent, at the ECB's target level, as the bank stepped in with an emergency injection of 42.2 billion euros.

"Psychological problems in the interbank markets can lead to problems in the real economy with banks not lending to each other and then hesitating to stand loans to individuals and companies," said Gijsels.

"High LIBOR rates are putting some pressure especially on the BOE not to hike rates," he said.