It was John Maynard Keynes, the economic guru made newly fashionable by the present economic turmoil, who remarked: “When the facts change, I change my mind. What do you do, sir?” His pragmatic riposte captures the stance now being struck by the Bank of England's monetary policy committee (MPC). Having wrestled for months with conflicting pressures from surging inflation and faltering growth prospects, the MPC's dilemma has been turned to dust by unprecedented financial turmoil.

With Britain's economy sliding into recession, the Bank acknowledged last month that its quandary was no more. After ordering an emergency half-point rate cut, it conceded that conditions have “shifted decisively”. All of this leaves the City certain that rates will fall again on Thursday by at least a half-point, to 4 per cent. Most economists believe the only question is whether the MPC delivers this, or something bigger - a three-quarter point or full percentage point cut. Here is our regular guide to the issues.

Growth and activity: falling fast

Dire news in recent weeks culminated in final confirmation ten days ago that Britain's economy shrank in the past three months by 0.5 per cent, registering its sharpest quarterly decline since the end of 1990, in the early throes of the last recession, and making a new recession an inevitability.

Worse still, the drop in activity was broad-based, hitting every part of the economy except agriculture and the public sector. With households squeezed by weak income growth, soaring living costs and tumbling house prices, the consumer-dependent retailing, hotels and restaurants sector slumped by 1.7 per cent.

Other indicators have been crushingly poor. House prices are down by about 15 per cent in a year, according to Nationwide Building Society data. On the high street, official figures showed sales growing at an annual rate of just 1.8 per cent in September, the weakest for 2 years. Unemployment is up by 141,000 in six months. Unsurprisingly, consumer confidence has plunged to levels not seen since 1991. Manufacturing conditions are the worst for 30 years, according to a CBI survey. Key purchasing managers' surveys of industry and services this week are also tipped to plumb record lows.

Nor is there much let-up in the financial squeeze from the credit crunch despite the Bank's half-point October rate cut or government moves to shore up banks. The number of new mortgages is down by almost 70 per cent in a year. Lending to companies is collapsing. The Bank's own survey shows that lenders expect to make credit even scarcer during the coming three months.

Costs and prices: falling soon

Consumer price inflation hit a record 5.2 per cent in September, but is expected to tumble as the last of huge rises in utilities bills has fed through, oil prices have more than halved from peaks of above $140 a barrel, and food prices are sliding.

As recession takes hold, inflation pressures are fading fast, with businesses set to find it very tough to raise prices and workers set to put keeping jobs above demands for higher pay. The MPC's big worry, that expectations of higher future inflation will make this unavoidable, is evaporating. Public perceptions of future price rises have tumbled, surveys show.

Only a steep fall in the pound threatens to fire further inflation by raising import bills. However, analysts believe the impact on prices will be scant in an environment where retailers will have to fight to persuade consumers to spend at all.

Global economy: falling everywhere

Fears of a global recession have soared. The US economy is shrinking for the first time in seven years in a consumer-led downturn. A spate of grim data points to recession in the eurozone, while a string of stricken emerging market countries have turned to the International Monetary Fund for emergency assistance.

Rates verdict: falling, but how far?

A half-point rate cut is a nearcertainty, with odds shortening on a bolder move.

Explore Economics

• Pre-Budget Report 2008

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• The Times MPC

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