Raise, cut or hold? It is a measure of the difficulties facing the British economy that the Bank of England could convincingly do any of these to interest rates today. The spectres of inflation on the one hand and a painful economic slowdown on the other suddenly look equally menacing, and equally probable.

The case for an interest rate cut is underpinned by the speed at which the economy is deteriorating. There is barely an indicator not pointing to a serious slowdown. Yesterday we learnt that output from the services sector, the main engine of the British economy, is shrinking for the first time in five years. The latest report from the Organisation for Economic Co-operation and Development is markedly more gloomy than six months ago about prospects for the world economy in general and the UK in particular: it cut its forecast for British growth to 1.8 per cent this year and 1.4 per cent in 2009 - nearly a point lower than Alistair Darling's most pessimistic projection. The Chancellor's upper estimate of 2.75 per cent for 2009 now looks, by OECD standards, like wishful thinking.

Survey after survey points to a waning of confidence both among consumers and business leaders. That is feeding into spending decisions at the shop till and in boardrooms' capital spending plans. Companies are already adjusting their investment plans - and their workforce needs - for more difficult conditions. The owners of B&Q, the hardware stores that thrive when people have the money to spruce up their kitchens and bathrooms but suffer when they put home improvment on hold, yesterday reported a slowdown in business so far this year. More importantly, they cautioned that things will get worse in the coming months, when the full impact of the housing market slowdown is felt.

The credit crunch is no longer just a headache for bankers. Every week another 27,000 UK households come off favourable home loan deals and abruptly find themselves paying significantly higher mortgage bills. Every week, firms find it harder to get bank loans and gain credit from their suppliers. For homeowners, the steady supply of happy pills provided by 15 years of consistently rising house prices has been rudely snatched away.

The case for a rise in the base rate is that only a significant jolt is capable of taming inflation in Britain. With prices of so many basic needs from food to transport and heating rising, the risk is that these feed into higher wage demands, which in turn push prices higher. It is just such a wage and price spiral that took hold in the 1970s and 1980s and required years of painful medicine to cure.

Inflation, for so long considered about as likely to return to British life as flares and platform shoes, is once again a very real threat.

The time to apply the brakes firmly is when serious price rises become apparent, which is now. Once inflation has taken hold in the form of wage demands and pay rises, it will be too late. So far workers have been comparatively restrained in demanding pay rises to maintain their real standards of living, but with unemployment low - and therefore job security relatively firm - policymakers would be foolish to assume that quiescence will continue.

In these circumstances, the Bank of England should hold rates at 5 per cent. This may be seen by some as a non-decision. It is not. Holding interest rates is a clear sign from the Bank that it will not bow to the easy populism of rate cuts, that it can and should do little to help the City to heal its self-inflicted wounds, and that it understands that its first and foremost duty is to keep a lid on inflation.

This is a difficult time for inflation hawks - which is, of course, when we really need them.