It cannot get much tougher than this. For months, the nine members of the Bank of England’s Monetary Policy Committee (MPC) have been caught in a vice between the conflicting pressures of rapidly worsening growth prospects for the economy and persistent and rising inflationary pressures.

Yet this month the opposing forces that the MPC must reconcile to reach their verdict on interest rates are more extreme than ever.

On one hand, the weeks since the committee last met have brought a barrage of bleak news over the economic outlook, raising the real threat of recession and confronting the MPC with the danger than any rise in rates could make that fate inevitable. On the other, an equally relentless torrent of bad news on price pressures, culminating in huge increases in utilities’ charges, threatens to drive consumer price inflation to 5 per cent during the autumn.

This must force members of the MPC to ask whether they can afford not to raise rates.

The acute dilemma that the MPC faces was already reflected last month in a three-way split in its voting, with one member, Tim Besley, casting the first vote for a rate rise since last June, while David Blanchflower, the committee’s arch-dove, continued to press for an immediate rate cut.

This month’s wrangling looks set to be still more intense, with MPC members conscious that the risks to the economy make the stakes still higher as the Bank prepares to unveil its latest forecasts in its quarterly Inflation Report next week.

Here, then, is our monthly guide to recent, key developments that the committee must weigh up.

Growth and activity: slumping

Official figures confirmed last month that overall growth in the economy during the second quarter has already slowed to a meagre 0.2 per cent, its weakest rate for three years.

The sharp slowdown was driven by a plunge in construction activity, as the slump in house prices undercut homebuilding, and as the industrial sector moved into recessionary territory. The annual pace of GDP growth in the second quarter fell to only 1.6 per cent, less than half the pace a year earlier.

This compared with the Bank’s May forecast of 2.3 per cent for this period and of a 2 per cent expansion over the year as a whole.

The rapid deterioration in the economy has been most clear from the housing market, with house prices now in apparent freefall. The latest figures from Nationwide Building Society showed that the value of the average home had plummeted by 1.7 per cent last month.

This was more than double the fall in June, and the ninth consecutive monthly drop in prices.

On Nationwide’s figures, average house prices are now 8.1 per cent down on levels a year ago, marking the sharpest annual decline since January 1991, during the last recession.

Worse still, there is scant hope of the housing slump abating, with wariness of would-be buyers combining with the drought in the mortgage market to undermine the market.

Leading banks provided only 21,118 loans for house purchase in June, a total down by two thirds from a year earlier.

Until recently, consumer spending had held up better than expected in the face of the severe squeeze on households from a soaring cost of living, weak income growth, falling house prices and rising mortgage bills. However, last month brought clear signs that the consumer may finally have gone into headlong retreat from the high street. Official retail sales figures showed that the quantity of goods sold in June plunged by 3.9 per cent, the biggest monthly drop for 22 years.

Although this was in part seen as “payback” for a surge in sales during the heatwave last May, there were signs of worse to come with the CBI’s latest high street snapshot showing stores reporting that sales in early July were the weakest for a quarter of a century.

Retailers’ expectations of future sales also hit a record low.

A further, ominous symptom of worsening prospects emerged as June figures revealed the sharpest monthly rise in unemployment since 1992, with an increase of 15,500 in numbers out of work and claiming benefits. It marked the fifth monthly rise in succession, with the rising jobless count threatening to deal further blows to consumer demand and the housing market. Consumer confidence has fallen to 30-year lows. Yet more confirmation of the economy’s fragility came from purchasing managers’ surveys showing that the manufacturing sector was shrinking last month at its fastest pace since the end of 1998, while activity in the crucial services sector was the weakest since October 2001.

Costs and prices: unrelenting

There was little respite from bad news for the Bank on inflation, either. The latest official figures showed that headline consumer price inflation had leapt to an annual rate of 3.8 per cent in June, from 3.3 per cent in May.

After news of huge planned increases in gas and electricity bills of between 20 and 35 per cent, City economists issued warnings that an autumn peak in inflation could be as high as 5 per cent, before the rate starts to decline into next year.

Severe price pressures in the pipeline were also clear as manufacturers’ costs rose at a record 30 per cent annual rate in June and prices for goods leaving factories by a record annual 10 per cent. Inflation is being further fuelled by a sharp slide in the pound, although sterling has recovered a little ground over the past month.

More optimistically, there has been some recent let-up in international food and energy costs, with oil prices down by 13 per cent in a month, wheat prices by 15 per cent and corn prices by 10 per cent. The Bank’s fears that rising prices will trigger inflationary pay deals, sparking a wage-price spiral have also remained groundless, so far, with average earnings growth remaining muted.

International economy: unsupportive

Britain’s rival economies on both sides of the Atlantic remain in poor shape. In the United States, prospects are fragile, with renewed financial upheavals, most notably the plight of Fannie Mae and Freddie Mac, the vast secondary mortgage lenders, as the American housing slump deepens. Employment has fallen for seven months in a row. In the eurozone, fears of a severe downturn are mounting in the wake of the European Central Bank’s decision to raise interest rates.

Rates verdict: No change, but a close call

The scale of the expected jump in inflation over the short term means that the MPC undoubtedly will contemplate a rate rise. However, the severity of the impending downturn suggested by figures across the board should persuade a majority to hold fire, for now at least.

Diverging views

After voting to raise rates last month, Tim Besley, the MPC’s arch-hawk, is expected to return to the attack this week. “We have to guard against the persistence of inflation and a little more action now could mean we are all better off in the end,” he said at the end of last month.

Yet other members are also likely to be concerned that, while a rate rise would quell inflation, it could risk turning a nasty downturn in the economy into a severe crash.In an interview with The Times last month, Kate Barker said: “The mistake we could make, and we are all worried about this, is of holding policy too tight and the economy weakening more than is necessary to get inflation back to target.”

David Blanchflower argued late last month: “I think we are going into recession, and we are probably in one right now. It’s not too late to stop it, but we have to act right now.”

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