More rate cuts from the world’s central banks, will allow the global economy to avoid slipping into depression, says Morgan Stanley’s global economics team.

Seven major central banks, including the U.S. Federal Reserve and the the bank of Canada, delivered a co-ordinated 50 basis point drop Wednesday.

“It took somewhat longer than we thought, but the cavalry finally arrived,” the firm says in a research note referencing the cut.

The firm notes that this action represents the first cut of the virtual global central bank. “It underscores not only that globalized economies and globalized markets require global action, but – more importantly – it shows that central banks, despite their different traditions, styles and strategies, are willing and able to work and act together. This is a very important signal to markets and the public at large. Leadership was required, and leadership they showed,” it says.

It also maintains that this move was overdue and is fully justified, in light of the damage that the intensified financial turmoil since September is likely to inflict on the real economy.

“These rate cuts do not materially alter our global team’s view that the global economy has entered a recession, with global GDP growth in 2009 expected to drop below the 3% recession threshold — our recently revised global GDP growth forecast stands at 2.7%. However, together with the important additional government measures to stabilize banks and the funding markets announced in the last several days, we are more confident that a 1930s-style depression can be averted,” it notes.

However, the firm also predicts that this co-ordinated cut is not the end of the rate reductions. “If funding markets and financial markets don’t stabilize, further similar coordinated action would appear likely. Yet, our strategists’ main case is that today will mark a bottom for credit and equity markets, and we expect funding markets to improve, too,” it says. “If so, while we expect further rate cuts in many countries, these are more likely to be announced at the upcoming regular policy meetings.”

It predicts that the Bank of Canada will likely need to ease policy further by an additional 50 bps before year-end, especially if the Fed cuts rates by another 50 bps as its U.S. team projects.

In Europe it expects a total of 125 bps of rate cuts from the European Central Bank, but suggests that significant further rate cuts from the Bank of England are not very likely.

In emerging markets, the policy responses are likely to be much more varied, it says. “In many cases (such as Brazil, India and South Africa), currency weakness and lingering inflation pressures should prevent near-term rate cuts. By contrast, many dollar peggers will go along with the Fed,” it adds.

Additionally, the firm says that recent government action to stabilize the financial system may be even more important than the rate cuts. “While this first rate cut by the virtual global central bank was spectacular and important, we think that the recent additional measures announced by several governments to address the funding crisis may be even more important in helping to restore confidence and trust in the frozen interbank markets,” it says.

“The recent and prospective massive action by fiscal and monetary authorities makes us confident that while the world faces recession, a 1930-style depression will be averted. The battle may not be fully won yet. But the message from [the central banks’ move] for us is that policymakers are willing to do whatever it takes to avoid very bad outcomes,” it concludes.