In the four long and tempestuous weeks since the Bank of England's interest-rate-setting Monetary Policy Committee (MPC) last met, the economic landscape of Britain and the world has been radically transformed. The dramatic financial turmoil that has wrought havoc across global markets has, at the same time, drastically altered the outlook for interest rates.

For most of this year, the MPC has wrestled with an intractable quandary over rates as its nine members have been wrenched in opposite directions by the conflicting pressure from surging inflation and faltering economic growth. Now, at last, the Bank's dilemma is beginning to resolve itself.

Steep increases in prices remain a headache for the MPC, but the rapid deterioration in the economic outlook has shifted the terms of the rate debate, so that it is now a question only of when, rather than if, a cut will come. With hopes now running high that rates will be lowered this week, here is our monthly guide to the key issues confronting the committee.

Growth and activity: tumbling

The bleak economic data of recent weeks have left little doubt that the UK is headed for recession and is probably already in the first such episode since the 1990s.

Official national accounts confirmed last week that growth ground to a halt in the second quarter, ending a 16-year run of uninterrupted expansion in Britain. The Bank's quarterly lending conditions survey revealed that the credit squeeze on households and businesses had intensified. Banks sharply curbed lending in the past three months and will do so more aggressively in the present quarter, to limit losses as borrowers become unable to keep up repayments.

The housing market is in a state of near-freefall. The Nationwide Building Society reported that prices last month were 13 per cent down year-on-year in September, their sharpest annual drop since 1991. Prices are falling by a startling 4.7 per cent a quarter. The mortgage drought suggests that there is little sign of any respite, with the number of new home loans approved reaching a record low of 32,000 in August. Annual growth in mortgage lending of 6 per cent is the weakest since late 1999.

The housing slump is fuelling a downturn in spending. Official GDP data shows that total consumer spending in the second quarter fell 0.1 per cent, the first fall since the mid-1990s. Surveys from the CBI and British Retail Consortium also suggest that consumers are in retreat, though there was an erratic 1.2 per cent monthly rise in the official figures for the quantity of goods sold in August. The Bank has made clear, however, that it is placing less weight on the official data.

The latest CIPS purchasing managers' survey of manufacturing showed activity plunging at the fastest rate in 17 years last month. The services sector, the powerhouse of the economy, also stalled in the three months to the end of July, according to official data.

Costs and prices: easing

Hawks on the MPC are likely to remain anxious about cutting interest rates at a time of rising inflation. Consumer price inflation rose to an annual 4.7 per cent in August, the highest since April 1992, triggering another explanatory letter from Mervyn King, the Bank's Governor, to the Chancellor. The MPC's rates decision will come only five days before new inflation figures are set to show the headline rate topping 5 per cent. The pound has dropped more than 12per cent in the past year, sending import bills soaring, but oil prices have tumbled from record levels above $140 a barrel to just above $90 in recent days, sending petrol prices 7to 8 per cent lower. A recent survey showed a pick-up in average pay deals to 3.8 per cent, but rising unemployment seems likely to keep a lid on wages.

International economy: stalling

The credit and banking crises leave both the United States and the eurozone struggling to escape recession. Recent surveys have highlighted the dangers they face. US manufacturing activity suffered its steepest fall since 1984, while services activity eked out small gains. Last month, US employment registered its steepest fall for 5 years. In the eurozone, industry is in its weakest state for seven years and services are contracting.

Rates verdict: on a knife edge

The odds on a cut in interest rates on Thursday have risen fast and are at least evens, with the clear prospect that more market convulsions could tip the MPC's hands. Some hawks on the committee will still argue, however, for waiting until November to give the Bank more time to explain and to show that it remains intent on vanquishing the inflation threat.

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