LONDON BRIEFING:A cut of more than half a point would be unprecedented, but might not be enough

HOW BOLD will the Bank of England's Monetary Policy Committee be tomorrow? Will the eight men and one woman charged with setting interest rates throw their previous caution to the wind and heed the growing calls for radical action?

In other words, will they slash rates by a full percentage point or will they continue to fret about inflation and opt for a "safe" half-point cut?

In what has been billed as the most crucial meeting since the committee was formed 11 years ago, its nine members begin their delicate, two-day deliberations this morning. The verdict will be released to the market at noon tomorrow.

A cut of at least 50 basis points, to 4 per cent, is regarded as a certainty by City of London economists. That would equal the emergency rate reduction rushed through by the Bank of England last month, just hours after the British government's dramatic bailout of the banking system, and part of a co-ordinated action by the world's central banks.

But there is a growing clamour for bolder action, particularly among politicians. Chancellor Alistair Darling has made it clear that he expects swift action from the MPC and is less worried about inflation than the prospect of a deep and damaging recession.

Since the Labour government handed over responsibility for setting rates to the Bank of England in 1997, the MPC has never made a move of more than half a point. A cut of 75 basis points, or a full point, would thus be unprecedented, and would take rates to their lowest level in five years. Some economists argue that will not be enough, however. Roger Bootle at Capital Economics, one of the City of London's best-known economists, has warned that rates will have to come down to just 1 per cent - an all-time low - if the economy is to have any real chance of recovery.

MPC members will be mindful of the dire outlook for the UK economy. Talk of recession is everywhere and consumer confidence has been shot to pieces. The gloom deepened earlier this week when the European Commission forecast that the recession in the UK would be the worst in Europe, and that unemployment would soar to 2.25 million.

While all eyes will be on the Bank of England at noon tomorrow, the MPC's rate decision is only part of the equation. The simmering row over the refusal of banks and mortgage lenders to pass on recent rate reductions to their customers flared up in spectacular style earlier this week, overshadowing an overseas trip by Gordon Brown.Accompanying the prime minister on the trip to the Gulf States were a number of leading business people, including David Hodgkinson, a senior executive at HSBC. Unfortunately for both the prime minister and Mr Hodgkinson, a troop of British political hacks was also present.

Thus Mr Hodgkinson's admission to reporters that the banks would not necessarily pass on the full benefit of any rate cut to their customers was beamed back to Britain in double quick time. With the banks currently taking full advantage of the bailout cash provided by the taxpayer, his words did not go down well. One of the conditions of the bailout was that the banks should start lending once again - and at reasonable rates.

The banks have been extremely slow to follow their part of the bargain, however. Almost a month after the emergency half-point rate reduction, half of them have yet to cut their standard variable rates. And, according to the website moneyfacts.co.uk, more than 80 per cent of them have not passed on the full benefit of the three most recent downward moves. In an extraordinarily badly timed announcement, mortgage lender Abbey last night revealed that, far from reducing rates, it was raising them by half a percentage point for new customers on its tracker mortgages. The increase, from 5.79 per cent to 6.29 per cent, comes into effect today. The lender defended its decision, saying it had been made in response to increases by its competitors.

The banks were unpopular even before they held out their begging bowls to the taxpayer. In their refusal to pass on rate cuts, they run the risk of enraging not only their customers, but also the politicians who brokered the unprecedented bailout package.

Business secretary Lord Mandelson, who was also on the Gulf trip, waded into the row from Dubai yesterday, warning the banks that they were embarrassing the prime minister on the international stage and that they face a serious customer backlash. His words clearly didn't worry the Abbey, but the banks should think carefully before they evoke the ire of the man known as the Prince of Darkness. There could be a horrible day of reckoning ahead.

• Fiona Walsh writes for the Guardiannewspaper in London.

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