Wolves will go into the Hawthorns clash on the back of four successive defeats after twice briefly topping the table at the start of the campaign.
Albion are only out of the bottom three on goal difference and playing catch-up after losing their opening three matches, including clashes with Manchester United and Chelsea.
McCarthy said: "Both of us are looking for points, both of us need performances.
"This is our biggest game, and bearing in mind we've lost four on the bounce and they're beneath us in the table, it is a huge game.
"It is even more than it would be normally. It is going to make it even more crucial because we both need points.
"People say as long as we beat our rivals they are not bothered what else happens but we all know that is crazy because we want to do well in the Premier League.
"But I also understand the importance of the bragging rights and we did well in these games last season."
McCarthy is paying little attention to his unbeaten record in managerial tussles with Roy Hodgson and insists his own side are in decent form despite their recent sequence of results.
He said: "Up until last season I had a hopeless record against Albion as I was reminded every time I faced the media!
"But equally Roy is a wily old coach and manager and I wouldn't take into consideration anything that has gone on in the past in games between us.
"Then there is the suggestion, with us having lost the lost four games, that we are in lousy form.
"But we are not. We've played well in every game bar QPR who played well against us."
Wolves picked up four points out of six against the Baggies last season and McCarthy knows the importance of such games to players and fans.
He said: "I've played in these sort of games for Barnsley against Sheffield Wednesday and Leeds, Yorkshire derbies, and they mean more to you when it's your team.
"But I can't deny the fact I've found this game to be tough and intense and realise what it means to people in the area.
"Everyone thinks their derby is the biggest whether it Celtic-Rangers, Everton-Liverpool, Manchester United-Manchester City."
Wolves have been dealt a blow with last season's leading scorer, Steven Fletcher, ruled out of with a calf injury during training earlier this week.
Fletcher netted 12 times last season is also the leading marksman with three goals during the current campaign.
With Wolves' other experienced striker Sylvan Ebanks-Blake not match-fit after his knee problem, McCarthy could be forced to alter his formation and play Kevin Doyle in a lone forward role.
Source: Team Talk
Source: Team Talk