The chart below looks like the cardiogram of a patient who is suffering a heart attack. This resemblance is not coincidental. The chart is indeed a sort of cardiogram of the British economy and financial system. Once you understand this, you do not need to be an economist or banker to realise that noon today, when the Bank of England announces its monthly interest-rate decision, will be arguably the most important moment for the British economy in the decade since Gordon Brown created his new monetary framework, built around the independence of the central bank.

What this cardiogram shows is the difference between the market interest rates in the British economy and the theoretical base rate that the Monetary Policy Committee sets each month. Normally this difference is very small, around 0.1 per cent, meaning that the MPCs policy decisions are being transmitted to the rest of the economy more or less as intended. In the past five months, however, an unprecedented gap has opened up between the rates.

As a result, businesses, homeowners and credit providers in Britain have experienced an interest rate rise of almost a full percentage point since the summer, even though the Bank has theoretically kept its policy “on hold” while assessing the consequences of the global credit crunch. This lengthy assessment must now stop. It is now perfectly clear that the British economy is moving into a serious slowdown. Meanwhile, the British banking system is on the verge of collapse, with total catastrophe only avoided by the biggest financial support operation ever offered to any private company by any government anywhere in the world.

Midday today is the moment of truth when the MPC will announce whether it has understood these dangers or whether it plans to test the British economy to destruction in pursuit of an academic experiment in laissez-faire central banking. If the Bank cuts interest rates today, even by as little as a quarter per cent, the danger to the economy will not be immediately lifted, but there will be definite cause for relief: a moderate slowdown next year, instead of a severe recession, will then be the most likely outcome. If, however, there is no rate cut then Britain will face far worse economic prospects than either America or Europe, and the whole economic framework created by Mr Brown ten years ago will be under threat.

To expect a rate cut of more than a quarter-point today is unrealistic, despite the much sharper rise in money market rates since the summer. The MPC would be right to move slowly, because some part of the market-induced rate rises could yet prove a temporary phenomenon connected with year-end distortions. The MPC is also understandably reluctant to show signs of panic and may fear that a surprisingly large rate cut could trigger turmoil in financial markets. If the MPC announced a modest immediate rate cut, it could quite reasonably wait until early February, when seasonal distortions dissipate, to judge whether the next step should be just another quarter or whether a more radical easing is warranted. The main thing is to send a clear signal that the rate-cutting process has started and this signal must be sent today.

But what if the MPC decides not to send this signal? The outlook for the British economy would then deteriorate from merely dangerous to dire. To explain why, let me reiterate a point made repeatedly on this page since the August credit crunch began: Britain is more threatened by this problem than any other major economy and is in much greater danger than the US.

This statement conflicts with conventional wisdom, which maintains that America is at the heart of this financial hurricane, while Britain is only indirectly affected. But that reassuring belief disregards at least five solid facts:

First, Britain's housing market is more vulnerable than America's. House prices and mortgage debt have both risen faster and their absolute levels are much higher, relative to personal incomes, in Britain than in the US.

Secondly, the British banks are also in greater danger than their American counterparts. Britain has already suffered incomparably the worst bank failure so far in the credit crisis, but even more ominous is that the Government was forced to guarantee all deposits in all British banks as part of the bailout of Northern Rock. Moreover, the stock market speculation against two of Britain's biggest clearers, Barclays and Royal Bank of Scotland, has not been matched against any major bank in the US.

Thirdly, Britain is structurally more vulnerable than America to a severe economic slowdown. This is because Britain's growth in the past decade has been driven by three forces — finance, housing and public sector spending — all of which are now going into reverse. To make matters worse, the City is about to be hit by the biggest tax changes in a generation, which are bound to drive at least some high-value financial activities offshore.

Fourthly, steep declines of the dollar and of long-term US interest rates since the summer will boost the US economy in the year ahead. In Britain, by contrast, the pound has until very recently been rising and long-term interest rates have moved far less than in the US.

Finally, and most importantly, the US Federal Reserve Board has been much quicker to respond to the credit crunch than the Bank. While the MPC has done nothing yet to counteract the increase in interest rates imposed by markets since August, the Fed has already cut its base rate by 0.75 per cent and will cut it again next Tuesday. The only uncertainty is whether it will cut by a quarter or half a point. With this speedy intervention the Fed may, in fact, have done enough already to revive the US economy. If so, the next few rate cuts may be seen, with hindsight, as an overreaction to Wall Street's self-serving demands.

But the Fed ignores such purist critiques — and rightly so. It is willing to give future historians the privilege of hindsight.

At times of severe financial stress the Fed transforms itself from an economic think-tank into a supremely pragmatic institution, with clear and unambiguous priorities: to avoid an unnecessary recession and to bring any crisis of confidence in the financial system quickly under control. These are the right priorities for any central bank at a time of financial panic. They are the priorities the Bank of England should follow today.

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