DECEMBER is not normally a month when the Bank of England sets the world alight. Only once in 10 years of independence has it changed interest rates in the run-up to Christmas.

It would be wrong to say members of the monetary policy committee (MPC) are too busy carousing at this time of year to think about altering rates, but something stays their hand. Will this December – this Thursday – be any different?

One straw in the wind is that the only December cut was when world financial markets were gripped by crisis, in 1998 when the Asian, Russian and Long Term Capital Management hedge-fund crises came together. The credit crisis that exploded onto the scene this August is still with us and has further to run.

A sudden shift of opinion has occurred on the “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs. The shadow committee is not usually given to wild swings.

Last month it voted unanimously to leave Bank rate unchanged at 5.75%, arguing that there was insufficient evidence of a credit-crisis impact on the economy. This month, five members vote to cut, and not just by a quarter of a point.

Tim Congdon of the London School of Economics, emphasising the need for the Bank to restore normality in the banking system, said there should be a half-point reduction.

He is joined by Peter Spencer of the Ernst & Young Item club, who is particularly concerned about the rise in Libor (London interbank offered rate), back above 6.5% last week, and its impact on small and medium-sized firms.

The third half-pointer is Peter Warburton of Economic Perspectives, who is concerned about Britain’s exposure to the global credit squeeze, and thinks the Bank will have to cut to 4.5% during 2008.

Even these three are outdone by Patrick Minford of Cardiff Business School. “It is time for some sense to prevail,” he said. “Rates need to be cut by 75 basis points at once to stabilise a fast-deteriorating situation.”

Strong stuff. The four are buttressed by John Greenwood of Invesco Asset Management, who opts for a quarter-point cut at this stage but notes that the credit “crunch” (there’s still a debate about whether this is a crisis, squeeze or crunch) has dramatically changed the outlook for the UK.

What about the noncutters? Two, Ruth Lea of Arbuthnot and Trevor Williams of Lloyds TSB, have a “bias to ease”, meaning they will be ready to reduce rates but not quite yet. Andrew Lilico of Europe Economics is neutral. My near namesake David B.Smith thinks Bank rate may yet move higher. It is a broad church, the shadow MPC.

It is not to be ignored and has a good record of predicting decisions of the actual MPC. What have we been hearing from the real thing? Two members, David “Danny” Blanchflower and Sir John Gieve, a deputy Bank governor, are already in the rate-cutting camp. Their view is that if Bank rate is to fall, as last month’s inflation report signalled, why hang about? They also think 5.75% is above the “neutral” rate, implying policy is restrictive.

Gieve, with his responsibilities for financial stability, is closer to the credit crisis than most MPC members. Blanchflower, who spends half his month at Dartmouth College, New Hampshire, is closer to the US economy. Goldman Sachs sees a 40%-45% probability of a recession in America.

Of the others we have heard from in recent days, Bank governor Mervyn King, Charlie Bean, chief economist, and Rachel Lomax, the other deputy governor, it has been hard to detect anything that hints at an imminent cut. Tim Besley and Andrew Sentance, the MPC’s überhawks, appear unbending.

Sentance said in a speech that the Bank was having to cope with two “shocks”: the downward impact of the credit crisis on growth prospects and the upward impact of higher oil and food prices on inflation. Oil prices have retreated a bit but not enough to resolve his or the Bank’s dilemma.

Lomax also put a bit of a dampener on things on a visit to Hull – a place that would benefit from cheering up – when she said the rate cuts implied in the Bank’s inflation report last month were “projections not promises”.

MPC members are good at playing their cards close to their chests. We have not heard from Paul Tucker or Kate Barker, who could be ready to cut. But as things stand none of the seven members who voted to hold Bank rate at 5.75% last month has even hinted they are ready to join the two cutters. This week’s decision will go down to the wire.

What should the Bank do? I have been cautious about calling for rate cuts in the wake of the credit crisis, for two reasons. One was the possibility, though not the likelihood, that the crisis would pass quickly. The other was lack of firm information on the impact of the crisis on the economy.

The first objection is fading. If we take three-month Libor as a guide, between early October and mid-November it hovered within half a point of Bank rate – not normal but not painfully high either. Now, it appears to be heading back to a percentage point above Bank rate.

Some of this reflects the end-of-year scramble for liquidity by the banks, which the Bank is trying to address, but it is also a reflection of the wider credit malaise. As long as Libor is at elevated levels, the Bank is presiding over a tightening of monetary policy it did not intend and the economy does not need.

On the second point, evidence is accumulating of an economic effect. Growth was revised lower in the third quarter and business investment flat. Consumer and business confidence are weak. Housing-market activity has tailed off sharply with prices down 0.8% last month, according to Nationwide (after an odd 1.1% October rise) and mortgage approvals at their lowest for nearly three years.

The Bank has to be forward-looking. If growth slows sharply, inflationary pressures will ease. That is why the time has come for the MPC to start reversing some of this year’s rate hikes. I opposed the quarter-point hike from 5.5% to 5.75% in July, so let me start by calling, not for a half or three-quarter-point cut, like some members of the shadow MPC, but a reduction of just a quarter-point.

Will it happen? Only members of the MPC know, and some of them have not yet made up their minds. Despite Lomax’s caution, rates are coming down. The only question is one of timing.

PS Scottish devolution has brought out a lot of strangeness. Watching an edition of BBC Question Time from north of the border – I know I shouldn’t –I heard panellists claiming it is nonsense to say Scotland gets more than its share of taxpayers’ money because public spending per head is higher in London.

How did they get to this number? By allocating all of the headquarters spending located in Whitehall and other parts of London to the capital, in the same way that applied to Scotland you would get a very big number for Edinburgh. Properly measured, spending on services per head last year in Scotland was £8,414, 3% above London and 21% higher than the average for England.

I mention this because it is time to award the prizes in my Freakonomics contest – films with real-life consequences. Jennifer Haynes suggests devolution would not have happened if Hollywood hadn’t fired up nationalist fervour with Rob Roy and Braveheart. Scots may disagree, but it’s too good a suggestion not to be true.

This is also the case for my second prize winner, Jeremy Kent-Baguley, who says there was an increase in marriage rates in America – and a decline in infidelity – after the film Fatal Attraction. Nobody, it seemed, wanted to risk getting on the wrong side of a potential bunny boiler. Thanks for all the suggestions.

david.smith@sunday-times.co.uk

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