Last August Jim Cramer of CNBC ranted that the Fed had "no idea" how bad markets and the economy were looking. The central bank duly obliged with a 50 bp cut in its discount rate. Sir Stuart Rose of M&S tried a similar trick yesterday when commenting on his company’s woeful Christmas trading results. Thankfully, the MPC held firm.

The economy has slowed significantly in recent months but it is not clear that growth is weaker than the MPC desired when they tightened policy last year. Household inflation expectations and business price-raising plans remain at or above levels that troubled Committee members then. Meanwhile, financial conditions have eased significantly over the last month as interbank lending rates have tumbled and sterling has weakened sharply.

A 25 bp cut remains likely in February but the MPC is right to be cautious given near-term inflation risks.

Today’s downbeat December sales figures from the British Retail Consortium confirm the slowdown in retail spending predicted by our leading indicator – see here. The indicator has weakened further over the last month, reflecting falls in mortgage approvals and consumer buying intentions.

Despite a gathering consumer slowdown, I still think the MPC should and probably will leave rates unchanged this Thursday. As recent US experience has demonstrated, easing policy before inflation expectations moderate is liable to boost price pressures while proving ineffective in stimulating the economy. Consumer inflation perceptions rose to a new post-MPC-inception high in December (before Npower’s recent announcement of 17% and 13% hikes in gas and electricity tariffs) – see chart. Statistical analysis confirms that the MPC takes consumer and business inflation expectations into account in setting rates and it would be a surprise if they ignored this deterioration.

Our MPC-ometer model forecasts a 5-4 vote for unchanged rates at this week’s meeting (four votes for a cut). This also appears to be the consensus view: 51 out of 63 economists polled by Reuters expect no change. By contrast, the respected Sunday Times Shadow MPC has voted 5-4 for a 25 bp cut. (Like the MPC-ometer, the Shadow MPC correctly forecast the December reduction.)

The key factors holding the model back from forecasting a January cut are high household and business inflation expectations and the recent sharp drop in the effective exchange rate. It also takes into account the tendency for the MPC to prefer to move in Inflation Report months. Weakness in activity indicators has not been sufficient to outweigh these factors.

Assuming a 5-4 unchanged vote this month, the model suggests a high probability of a cut in February. There is clearly a chance that the Committee will choose to act early, as it did in January last year. However, with LIBOR spreads and sterling falling, financial conditions have eased significantly since its last meeting, giving it scope to wait for further information before acting again. I think that would be the right decision given troubling near-term inflation prospects.