Periods of economic expansion tend to be slower, shallower and more elongated than people forecast. Periods of economic contraction are generally quicker, steeper and shorter than they expect. As the Monetary Policy Committee prepares to meet tomorrow to consider one of its most difficult decisions in years, this simple observation - made by Alan Greenspan after 20 years chairing the US Federal Reserve - provides a good guide to the setting of interest rates. Policy should match the differing characters of booms and busts: to manage the good times, rate rises are necessarily small, slow and steady; and to deal with a slowdown, cuts need to be early, sizeable and in quick succession.

Monetary policy has become a heated issue in Britain. Only six months ago, Mervyn King was being ridiculed for failing to raise rates in time to tame inflation. Now, Mr King is being criticised for refusing to cut rates, when an apparently faltering economy yearns for an easing of borrowing costs.

The reality is that Mr King and the fellow members of the MPC face an urgent choice in uncertain times. Western economies are facing the prospect of a mild bout of stagflation: stagnant economic growth combined with rising inflation. The pressures on the committee to cut rates – a slowing housing market, a seizure in the City and the spectre of a recession in the United States - are self-evident. At the same time, the forces driving up prices - oil at nearly $100 a barrel, rising costs of goods coming out of China and ever more expensive farm goods – are still gathering.

Adding to the confusion, the full effects of the indigestion in the City have yet to be felt on the high street. As Mr King told the Commons Treasury Committee last week, the short-term outlook is “uncomfortable”. For the nine MPC members wrestling with these conflicting pressures, it is all too easy to choose to do nothing. But sitting still is, in this case, no way to deal with an “uncomfortable” position.

Inaction will, on this occasion, only add to the sense of uncertainty.

The Bank of England has already signalled that interest-rate reductions would be needed by the spring. Sir John Gieve, the deputy governor, has indicated his eagerness to cut rates, particularly given signs of the slowdown in the housing market. And while Rachel Lomax, Mr King’s other, pragmatic deputy, insisted last week that these indications of rate cuts to come in the Inflation Report were “projections, not promises”, it is now clearly time to turn them into reality.

Inflation is a long-term battle. Growth is threatened in the near future. It is time to apply the Greenspan rule of thumb: downturns may be steep, but they can also be short, if central bankers respond to them early and often. The MPC should cut rates on Thursday by a quarter-point.

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