As the Bank of England’s rate-setting Monetary Policy Committee gathers this week, its largely united front since the start of the credit crisis last autumn has given way to division. The fraying of the MPC’s consensus means that, despite bleak headlines over economic prospects, most of the City believes that the chances are slight of a back-to-back cut in interest rates on Thursday.

In April the MPC suffered its first three-way split for two years over last month’s quarter-point cut, so another intense debate is likely at its Wednesday and Thursday meeting. Here is our monthly guide to the issues behind the verdict to come.

Output and activity: on the slide

In April initial first-quarter GDP figures showed growth slowed to 0.4 per cent, from 0.6 per cent in the previous three months, its weakest performance for three years. The slowdown came as the credit crunch sapped activity in business services and finance.

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Background

• Darling hit with £16bn tax hole

• King's City bonus comment attacked

• Bank predicts crisis will hit UK hard

• Consumer slowdown 'could last until 2010'

Multimedia

• Full credit crunch coverage

• Video briefing: global market instability

Background

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• Hedge funds stars made $2bn from US sub-prime

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• Sub-prime mortgages explained

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Other gauges of activity have given still stronger signals of a downturn, especially the housing market, with data indicating that house prices are tumbling having sparked fears that a correction could mutate into a crash. Nationwide Building Society reported that house prices fell by 1.1 per cent last month, the sixth monthly drop in a row, while Halifax detected a 1.3 per cent fall on the heels of 2.5 per cent slump in March. On the Halifax figures, prices are down 3.7 per cent on a year ago, the steepest annual fall since 1993. Big falls in mortgage approvals threaten to accelerate the slide.

Yet, despite fears that housing market woes will hit consumer confidence and lead to household spending hitting the buffers, the Bank is sceptical of the knock-on impact of falling house prices. Mervyn King, the Governor, is sanguine over the fallout.

Official retail data showed that the volume of goods sold in March fell 0.4 per cent, but that steep gains in January and February left quarterly sales up 2 per cent – the strongest gain for four years. These figures were at odds, however, with other evidence that the consumer is in retreat, with CBI and British Retail Consortium surveys suggesting that spending is on the wane.

More optimistically, unemployment has continued to fall, while the manufacturing sector continues to record modest gains in output, although a slide in industry orders has emerged.

The Bank has argued that the worst of the credit crunch could be over, with hopes of this boosted last month by its unveiling of a £50 billion-plus lending lifeline for banks.

Costs and prices: still on the rise

There has been little reassurance on inflation to ease the MPC’s anxieties and the Bank is widely tipped to revise up its inflation forecasts in its quarterly assessment next week. Consumer price inflation was stuck at 2.5 per cent in March for a second month and is set to exceed the Bank’s 2 per cent target over the summer.

A key factor is the pound, with its trade-weighted value down 4 per cent since February, stoking import bills. Oil has surged to $115 a barrel from just over $100 a month ago. The cost of goods leaving factories rose in March at a record 6.2 per cent pace as manufacturers passed on soaring costs to customers. The MPC will fret especially over another rise in public expectations of future inflation to record highs, which could yet ignite pay pressures. So far, however, wage inflation has remained subdued.

International economy: slippery slope

First quarter US GDP figures confirmed that growth all but stagnated for a second quarter in a row, rising at a quarterly pace of about 0.15 per cent. Conditions in Europe have been more mixed, but Brussels has again downgraded its forecast of future prospects. In April, Germany’s Ifo index, a key barometer of business sentiment in Europe’s biggest economy, had its biggest monthly fall since September 2001.

Rates verdict: on hold

With little to ease the Bank’s inflation fears, divisions on the MPC seem certain to mean it holds rates this month.

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