When Mervyn King, the Bank of England's Governor, was asked by the Commons Treasury Committee late last month if renewed market upheavals and the tightening credit squeeze left it more predisposed to cut interest rates again, his answer was as blunt as it was crystal clear. “Yes,” he replied.

For most people, the tumult of grim economic news in recent weeks will make the case for a new rate cut seem open and shut, and the verdict of the Bank's Monetary Policy Committee (MPC) this Thursday an inevitability.

In the City, Mr King's comments have left expectations that the committee will this week order its third cut in the Bank rate in five months, to 5 per cent, running high: 48 out of 63 economists polled last week by Reuters are betting on a cut.

Yet the reality is that, far from a cut on Thursday being a done deal, the MPC remains vexed by a continued dilemma created by the conflicting pressures of mounting threats to growth and persistent inflationary threats.

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Even analysts who expect a cut concede that this makes the Bank's decision the closest of calls. Here, then, is our monthly guide to the stakes.

Output and activity: bearing up, under strain

Resurgent stresses in money markets and the tightening of the credit crunch that this has triggered, with the supply of mortgages succumbing to an intense squeeze by lenders who are strapped for cash, will be critical to the MPC's debate.

Mr King said last month that the credit crunch (a term he himself used for the first time) had entered a “new and difficult phase”. Since then, a series of mortgage lenders have pulled home loan deals, raised rates or pulled down their shutters to would-be borrowers.

The Bank's quarterly credit conditions survey highlighted the strains last month, showing that lenders expect availability of funds for household and companies to grow still more scarce.

The central anxiety over prospects is that the credit squeeze will combine with the housing downturn, and its toll on sentiment, to sap consumer demand and hit growth.

The Nationwide Building Society confirmed that average national house prices fell for a fifth month in a row in March, taking their decline over the past three months to almost 3 per cent, or £7,000. Predictions of falling prices over the full year have multiplied, with annual house price inflation set to turn negative by next month on some measures.

Worries over consumer demand were underlined as national accounts showed that household spending growth in the final quarter of last year (Q4) all but ground to a halt, rising a meagre 0.1 per cent as fretful Britons increased their savings.

There are some signs of the wider economy faltering. The CIPS purchasing managers' survey of services, the dominant sector of the economy, showed its activity at a four-month low last month.

Yet, not all the news has been negative. The economy as a whole grew by a robust 0.6 per cent in Q4, so has some continuing momentum. Retail sales volumes defied plunging consumer confidence to jump by a strong 1 per cent in February, on official data, and unemployment has continued to fall.

Costs and prices: on the rise

There is no shortage of concerns over price pressures to provoke MPC hawks to show their talons, with oil prices stuck near record levels and inflation being stoked by steep falls in the pound, which has sunk to record lows against the euro. Sterling's trade-weighted index has plunged by almost 10 per cent since November.

There are further signs, too, of companies attempting to push up prices to offset rising costs. Input costs in the services sector are rising at their fastest since 1996, with prices charged still on a steep upward path. Similar pressures have persisted in manufacturing, with record gains in the cost of goods leaving factories.

Meanwhile, headline consumer price inflation climbed to 2.5 per cent in February and is expected to rise towards 3 per cent, adding to the MPC's fears that households and companies will come to expect rising living costs and push up prices and wage demands still further. Surveys of inflation expectations have shown steep increases.

There is scant reassurance for the MPC over inflation, except the hope that high street competition stoked by weak demand will force retailers to keep a lid on prices, while a slowing economy eventually will tame the extensive pressures.

International economy: growing gloom

A litany of dismal news from the United States, with last week bringing the sharpest monthly fall in employment for five years, has reinforced the belief that the world's biggest economy has slid into recession.

Worries over the global credit crunch and strains in world markets have been inflamed after the Federal Reserve was forced to engineer a rescue of Bear Stearns, the stricken investment bank.

Conclusion: on a knife edge

The tightening of the credit squeeze is likely to tip the balance for a quarter-point cut, in what will probably be a surprisingly intense debate.

Is it crunch time?

Comments from the MPC recently have emphasised what Mervyn King calls the “difficult balancing act” between inflationary dangers and threats to growth.

Paul Tucker, the Bank's director for markets, said “credit conditions are tighter, underlining the downside risk”. But inflation concerns meant the MPC could not necessarily respond by cutting rates.

Andrew Sentance, who, with Tim Besley, is the MPC's arch-hawk, argued that “an outright recession is a remote risk”, noting that “consumer sentiment has proved more robust”.

David Blanchflower, the MPC's chief dove, argued that inflation fears were exaggerated. “Worrying about it is like fiddling while Rome burns,” he said. “It is time for the MPC to lead rather than follow”.

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