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The nine members of the Bank of England's monetary policy committee gather tomorrow for arguably their most important meeting since the incoming Labour government handed responsibility for interest rates to Threadneedle Street in 1997.
With the economy widely acknowledged to have entered a recession for the first time since the early 1990s and tumbling oil prices set to drag inflation down sharply, expectations are growing that the MPC could deliver the biggest cut in borrowing costs in its 11-year history.
The committee, many of whom have been reluctant to cut rates this year because rising oil prices in the first half pushed inflation to its highest in 16 years, last month joined other central banks around the world in enacting an emergency half-point reduction, taking the bank rate down to 4.5% - its lowest for two years.
But rates in Britain are still the highest in the Group of Seven leading economies. The United States Federal Reserve last week cut its key lending rate by half a point to just 1% - equalling a five-decade low set in 2003. The European Central Bank's main interest rate is now at 3.75% and the ECB is widely expected to reduce it again this Thursday, within an hour of the Bank of England's announcement of a cut.
The committee's arch-"dove" - Professor David Blanchflower - will doubtless be arguing for a full percentage point cut, feeling that his gloomy views on the economy this year have been proved right and rates must now be cut as quickly as possible. Others, some of whom were voting for higher rates as recently as August, may be reluctant to agree with him, however.
Roger Bootle, head of the consultancy Capital Economics, thinks rates will have to be cut to as low as 1% to ward off a prolonged and painful recession caused by the year-old credit crisis and collapsing house prices.
"Extraordinary circumstances require extraordinary actions. With the current recession likely to be deeper than that in the early 1990s and the credit crunch impairing the effectiveness of monetary policy, we now expect UK interest rates to fall to an all-time low of just 1%," he says.
A recent poll by Reuters shows that City economists are unanimous in expecting the MPC to cut at least half a point off rates this week. A 50 basis point (bp) cut would equal the biggest move the MPC has ever made, but a 75 or 100 bp move would take it into uncharted territory. If it cut a full point, that would take rates down to 3.5%, a level last seen in 2003 and before that not since the 1950s.
The chancellor, Alistair Darling, used last week's annual Mais lecture to deliver a strong hint that the MPC should cut rates quickly and deeply to head off a slump he has characterised as potentially the worst for 60 years.
"The chancellor has given the committee a green light to cut bank rate and not worry for now about the consequences for inflation. In these circumstances, the MPC may seem to have a strong case for slashing the rate to a level that would surely bring some relaxation, however slight, in credit market conditions," said Stephen Lewis, economist at Monument Securities.
The European commission added to the gloomy outlook yesterday, predicting that the UK's recession would be the worst in Europe, with the economy shrinking by 1% in 2009 and barely returning to growth in 2010. The commission predicted unemployment would rise by half a million to 2.25 million. Comments from Bank of England governor Mervyn King and other MPC members over the last month or so have shown the committee is now much more worried about the recession than inflation.
Inflation on the Consumer Prices Index measure is at 5.2%, two and a half times the committee's 2% target. But with that rise having been caused mainly by the surge in oil prices in the first half of the year to nearly $150 a barrel, inflation is now expected to drop very sharply because oil prices have more than halved since July, bringing petrol prices at the pumps down below £1 a litre.
Yesterday US light crude was trading at around $65 a barrel, a level many experts think could fall further as recession seizes many of the world's major economies and crimps demand for oil.
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