The Bank of England is set to slash its economic growth forecasts today and analysts say the extent of the downgrade is key to how much further interest rates will fall, if at all.
Policymakers trimmed rates last week to 4.5 per cent for the first time in two years as widely expected, but economists are sharply divided on how soon the next cut will come and how many more are in store.
What is clear is that a rapid slowdown in household spending this year has been a significant drag on the world's fourth largest economy, which not too long ago was firing on all cylinders and had markets fretting about higher rates.
Recent revisions by Government statisticians to past growth estimates have only made that slowdown seem sharper and could flatten the BoE's outlook for inflation. In June, inflation hit the Government-set two per cent target.
The BoE quarterly Inflation Report that was prepared for use at last week's rate-setting meeting could show 2005 growth expectations revised sharply lower than the trend rate, or long-term potential rate, that policymakers projected in May.
With manufacturing again in recession it is not clear how soon growth, which hit a 12-year low in the second quarter, might pick up again beyond 2005 - and what that will mean for inflation two years out.
"Cosmetic revisions may encourage the market to look for a shallow rate-cutting cycle. However, there is also some chance that there are wholesale downward adjustments," said Alan Castle, UK economist at Lehman Brothers.
Also key is the BoE's assessment of how much spare capacity remains in the economy. The Monetary Policy Committee said last week that the slackening in the pressure of demand on supply capacity should lead to some moderation in inflation.
The MPC also said that the recent fall in the pound and higher stock prices should boost future growth, which led some analysts to conclude that the rate cut was probably a one-off and not the start of a series.
In recent months the MPC has identified flagging consumer spending as a key risk and said on Thursday that downside risks remained in the near-term.
But, overall, policymakers will probably want to avoid giving the impression that there are many more cuts to come - not least because they don't want to spark more borrowing by already heavily indebted British consumers.
"There isn't much slack in the economy so we expect the MPC to be more cautious in lowering rates than they were in raising them between November 2003 and August 2004," said Geoffrey Dicks, UK economist at RBS Financial Markets.
"The depreciating exchange rate may also feature more prominently in the August Inflation Report and this could also serve to limit the extent of any further interest rate reductions." On a tradeweighted basis, sterling is down 2.3 per cent since May.
If the MPC is perceived to be on the road to reducing rates quickly that could further weaken the pound, although in recent days it has regained some ground against the dollar, precisely on the view that another rate cut isn't necessarily around the corner.
But economists like Jonathan Loynes at Capital Economics, who have been forecasting a series of BoE rate cuts for quite some time, point out that the MPC's track record suggests it does not fine-tune the economy.
"Rather, it tends to keep interest rates unchanged until it is convinced that rates need to move and then moves them a number of times in quick succession," he said.
