It is not too often that committees make history. When the nine members of the Bank of England’s Monetary Policy Committee gather on Thursday to cast their votes on interest rates, it will be a more than usually daunting moment.

MPC members will be conscious not only of the immense challenges facing the economy this year, but also that they are poised to cut Britain’s official interest rates to a low not seen before in the Bank’s 314-year history.

After the MPC’s drastic actions of the past two months reduced the Bank rate by 2.5 percentage points to an already historic low of 2 per cent, City economists are unanimous in expecting that it will cut rates still further this week. The only uncertainty is over whether the cut will be by a half-point, three quarters or a full percentage point. Whatever the scale of the cut, it will mark a watershed in British economic policymaking. As the MPC begins this week to weigh up its best move, here is our monthly guide to the factors that it must consider.

Growth and activity: crashing

The past four weeks have proved anything but festive for the economy, with an unrelenting deluge of dire news from every sector and region indicating little prospect of any new year cheer. Official data show estimates of the contraction in GDP suffered in the third quarter revised to indicate that the economy shrank by 0.6 per cent, rather than the already steep 0.5 per cent plunge initially reported. Economists now expect GDP to have slumped by up to twice as much, and perhaps more, during the past quarter, when estimates are released on January 23.

Critically, the brutal squeeze on economic activity from the credit crunch, as banks curb the availability of loans to consumers, prospective home buyers and businesses, is growing still more intense, according to the Bank of England’s own Credit Conditions Survey. This revealed that banks have further restricted lending in the past quarter and intend to tighten the screws still more in the present one.

The squeeze on mortgage lending is seen as a crucial driving force behind the continued slump in house prices. The number of new home loans agreed in November fell to another record low of only 27,000. House prices fell by another 2.2 per cent last month and by almost 19 per cent over the whole of last year, according to survey data from the Halifax.

Fears that the economy is sliding into a vicious downward spiral are being heightened by steep increases in unemployment. The number of people out of work and claiming benefits leapt by 76,000 last month, to more than one million people, and is rising even faster than in the early phases of the last recession.

Job losses are mounting amid a growing toll of business bankruptcies, with Woolworths being the most high-profile casualty in recent weeks. Businesses of all kinds report crumbling demand and orders and falling output. In manufacturing, output in November was down by 4.9 per cent from levels a year earlier.

Signals on the state of consumer demand remain clouded by surprisingly resilient official data. These showed that retail sales volumes in November rose by 0.3 per cent, although this still cut annual growth to 1.5 per cent, the weakest for 2½ years. Total consumer spending fell for a second quarter in a row in the third quarter, dropping by 0.2 per cent.

Costs and prices: collapsing

Inflationary pressures are rapidly melting away as the economy wilts. Headline inflation on the consumer price index fell to 4.1 per cent in November, from a September peak of 5.2 per cent and is expected to drop rapidly back to the Bank’s 2 per cent target, and below. Strong downward pressure on inflation is being exerted by tumbling oil prices, with the cost of crude having dropped by $40 a barrel to about $47, compared with last year’s record highs above $140. A steep drop in the pound, by more than 23 per cent on its trade-weighted index, would normally inflame Bank worries over the inflationary impact of soaring import bills, but the weakness of the economy is seen as effectively cancelling out such concerns.

International economy: crumbling

News from the eurozone, America and Asia has been unremittingly bleak in the past month, with global recession taking hold, leaving little support for the economy from overseas.

Rates verdict: tumbling

A cut is inevitable, and a reduction by a full point to only 1 per cent seems very possible, with at least a half-point more all but guaranteed.

History in the making

Even after last month’s percentage-point cut in Bank rate took the official cost of borrowing to a 54-year low of 2 per cent, MPC members have left little doubt of their readiness to drive rates still lower, into territory uncharted in the Bank’s history, stretching back to 1694.

Charlie Bean, the Bank’s Deputy Governor, conceded in an interview last month that Bank rate could have much farther to fall. “We may of course find them [interest rates] getting all the way to zero,” he said.

David Blanchflower, an external MPC member and the committee’s most doveish figure, emphasised the dismal outlook. “I expect unemployment to continue to rise through 2009 and into 2010, probably to over three million . . . Where is the light at the end of the tunnel? I can’t see any,” he said.

Mervyn King, the Governor of the Bank of England, highlighted fast-fading inflation threats in a letter to the Chancellor on December 16. “It is quite possible that I will next need to write to you to explain why inflation has deviated by more than one percentage point below the target during 2009,” he wrote.

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