It is highly likely, but by no means certain, that the Bank of England will cut interest rates again this Thursday. What is not in any doubt is that the Bank's decision, whatever it is, will bring renewed criticism of its Governor, Mervyn King.

If rates are cut by a further quarter point, there will be cries of “too little, too late”. If the cut is deeper, he will be accused of panicking. If he does nothing, he risks being run out of town.

The decision is more than usually tricky. Clearly, conditions in the credit markets have worsened. Over the past couple of weeks, every day has brought the news of further tightening in the mortgage market.

Yesterday it was the turn of Abbey, which became the last leading bank to stop offering 100 per cent mortgages.

But the Bank's job is to keep a lid on inflation and there the news has also been bad.

Many of those urging the Bank to cut interest rates more dramatically argue that it needs to take action now to combat the credit crunch and can afford to worry about inflation later.

But as Paul Tucker, a senior Bank official who sits on the committee that sets interest rates, explained last week, once the inflation genie is out of the bottle it is hard to get it back in.

And at all costs the Bank wants to avoid getting in the position where it would have to raise rates to restrain inflation, exacerbating a slowdown in activity.

Mr Tucker also signalled that any change to the policy of gradual rate cuts risked fuelling inflation expectations.

The big problem is that a quarter-point cut is unlikely to have much, if any, short-term impact on the mortgage market.

Mortgage lenders are engaged in an increasingly frantic battle to avoid taking on new business, at whatever rate, because of continued uncertainty about bank balance sheets and the future availability of funding from the wholesale markets.

It is in terms of the Bank's approach to these problems that Mr King has come under most fire.

As the crisis started to unfold last year, Mr King did not hide his distaste for taking action that could be seen to be “bailing out” reckless lenders at the expense of the more prudent.

Mr King is not the City's biggest fan, a sentiment the City heartily reciprocates.

But the impression that the Bank has been more cautious in providing liquidity to the markets than the European Central Bank more recently is misleading. The ECB has done a much better job with its PR.

The Bank belatedly widened the range of securities that banks can use as collateral in its auctions for long-term funds. The latest auction takes place today and observers will be looking closely to judge the Bank's determination to keep the market well funded.

The Bank has also raised expectations that it will take more dramatic action that would, in particular, support the market for mortgage-backed securities. Trading in these instruments has almost dried up, forcing banks to take unrealistically large writedowns on their holdings, making them less willing to lend.

The snag is that it would be difficult for the Bank to take such action on its own and agreeing a coordinated approach with other central banks will take time.

More may depend on that - for the markets and Mr King's reputation - than on Thursday's interest rate decision.

david.wighton@thetimes.co.uk

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