Here's wishing you a thoroughly mediocre Christmas. That doesn't sound very nice does it? But I bet you that this sums up the views of the Governor of the Bank of England and his colleagues on the Monetary Policy Committee, as they look forward to their latest decision on interest rates this Thursday.

Clearly, Mervyn King is concerned about the outlook - for both the economy (on the downside) and inflation (on the upside). It is unusual for there even to be speculation regarding a possible rate move in December - the MPC should be gearing up for its Christmas party rather than getting serious about a possible rate cut. But this week these key policymakers cannot avoid full and frank discussions.

If in their shoes I would be minded to vote for a rate cut - but to marry this with a message re-enforcing the need for caution and trying to head off any enhancement of the "feelgood" factor at this delicate stage of economic developments. A December rate cut should not be seen in any way as a justification for renewed retail and related excesses, even if this is the festive season.

On the other hand - and there always is another hand in these matters - if the MPC were to vote for a standstill in rates, and disappoint some expectations, then those voting for no change would not wish this to be seen as reason for withdrawing entirely from celebrations. The downside risks remain marked, and the desire for a "Goldilocks" economy - not too hot but not too cold - still applies. Delicacy and balance must be the watchwords.

Evidence of the domestic slowdown is now very clear. The latest survey of business conditions by the Bank of England's Agents across the UK - as well plugged-in a group as you could wish to find - refers to further easing of consumer spending and of both the demand for housing and house price inflation. There is also a reference to investment intentions in the service sector falling sharply "again" and credit conditions posing risks for the investment outlook.

Last month, the MPC voted seven-to-two for no change. The two members voting for a cut were the external member Professor David (Danny) Blanchflower - one of the speakers we have lined up for the David Hume Institute's spring '08 seminar series - and Deputy Governor John Gieve.

The Blanchflower vote was expected, the Gieve vote most certainly was not. The other Deputy Governor, Rachel Lomax, has generally been perceived to be of a dovish tendency.

She voted for no change in November, but in a recent speech dropped heavy hints that she will be thinking afresh this time around. She referred to a risk that the economy may be slowing "too abruptly" while monetary policy may be "on the restrictive side".

Another recent speech came from external MPC member Andrew Sentence, a recent visitor to Edinburgh University for the launch of the Scottish Institute for Research in Economics. He was more measured than Lomax.

Although he suggested that the recent financial market turmoil "will tend to reinforce this slowdown in the short term", he also stressed uncertainties and the risk that demand and cost pressures could "turn a temporary rise in inflation into a more sustained increase". On balance he sounds like a "no change" man.

The inflation risk relates to the further surge in oil and commodities prices. But these price rises have two effects, which can be offsetting. Higher input prices may cause short-term upward pressures on retail prices, but they also tend, as my successor at Royal Bank of Scotland, Andrew McLaughlin, has pointed out, to act as a tax on consumers thereby exerting a deflationary influence in the medium term.

While the risks to activity on the consumer side remain skewed to the downside, I worry relatively more about those deflationary effects.

That is particularly the case while the US economy causes such concern, alongside and related to financial market jitters.

Sentence rightly points to a stronger link between the UK and the core of the EU than with the US. True, but the core EU also looks to be slowing and the downside risk story applies there in addition to here in the UK.

In sum, a rate cut will not prove salvation but the case for a cut is clear. Some MPC members will argue for delay, until the evidence is more precise and inflation risks can be seen to be receding. That could be unwise, especially as the Christmas season matters so much to so many businesses.

A really weak Christmas could adversely influence already precarious confidence among consumers and businesses. It is that old balance thing again - the decision and the message must be carefully crafted. This is as difficult time for the economy and for policy makers as I can recall for many a long year. Sorry but true.