If anyone needed proof that the dilemma for the Bank of England’s Monetary Policy Committee was deepening, it emerged last week. As official figures showed that the economy had ground to a halt for the first time since the last recession in the early 1990s and inflation had soared to a 16-year high of 4.4 per cent, more than double the 2 per cent target, the divergent views within the committee were laid bare.

Tim Besley said that the Bank needed to hold firm on inflation lest it got out of control, but, just days later, David Blanchflower signalled that he would be calling for a significant rate cut at this week’s meeting as the threat of a serious economic slowdown increased. Meanwhile, Charlie Bean, deputy governor of the Bank of England, issued warnings of the pain in store for consumers, saying that Britain was facing its biggest economic challenge since the 1970s after being rocked by a series of financial “grenades”.

There has been a three-way voting split between the nine-member committee for the past two months as Professor Besley has pressed his case for a rate rise and Professor Blanchflower has voted for a 25-basis-point cut in rates. This week’s meeting could follow suit, although the number of members voting for a rate cut might increase after the Bank’s inflation report raised the possibility of inflation actually undershooting the 2 per cent target in two years if rates were kept at 5 per cent. But the chances of a cut are slim until inflationary pressures ease.

Here are the key developments the committee must weigh up:

Growth and activity: ground to a halt

Economic growth stalled between April and the end of June and gloomy news from the manufacturing and services sectors indicates that there is little chance of a turnaround in the third quarter. Factory output dropped by 0.8 per cent between April and June, while growth in the services sector - which includes businesses from hotels and restaurants to accountants, lawyers and architects - slowed to the slowest pace in more than 12 years, expanding by only 0.2 per cent. Retailers reported dismal trading conditions in August, with the CBI’s monthly survey recording its worst result in a quarter of a century. The deterioration in the housing market picked up pace in August, with prices dropping at the fastest rate in 18 years. Homeowners have seen more than 10 per cent, or £22,000 on average, wiped off the value of their houses, according to figures from Nationwide Building Society. Yet there is little hope of a recovery as transactions linger near historic lows, meaning that sellers must slash their prices further to attract interest from the dwindling number of buyers.

Costs and prices: still rising

Despite falling oil prices, energy companies are increasing prices, piling more pressure on households. The Bank has said that inflation is likely to increase to more than 5 per cent before it falls away sharply, so there is more pain to come. There was a glimmer of hope as the falling oil price was reflected in a slight easing of cost pressures on manufacturers. Input price inflation fell from 30.8 per cent to 30.1 per cent in July. The CBI’s survey also showed the first drop in price expectations among retailers for seven months. But the continuing weakness of sterling, which fell to a two-year low against the dollar on Friday, is exacerbating inflationary pressures, as imports rise in price.

International economy: Still gloomy The US economy rallied in the second quarter - with exports booming on the back of the weak dollar and the added pep of the $100 billion package of tax rebates. GDP growth was revised up from 1.9 per cent to 3.3 per cent, but analysts said that output could fall in the second half. There is also mounting evidence of a slowdown in the eurozone, although it is expected to perform better than the UK.

Verdict: No change

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