Have we reached the moment when the contagion in the rarefied world of the credit markets finally begins to infect the real economy? This week two well-known fashion retailers, French Connection and Next, warned that trading conditions are likely to become a lot more difficult in the coming months. And yesterday, Home Retail Group, the owner of Homebase and Argos, sounded a similarly downbeat note. Expectations are being played down before the all-important Christmas selling season.

But it would be premature to state that this is a direct result of the turmoil in the financial world. Next's six-month results were actually better than expected. And what disappointing sales there have been in the retail sector owe more to the wet summer than the carnage in the credit markets. Sportswear retailers, such as JJB, which announced a fall in profits this week, have been hit hard by the poor weather.

Yet there is a connection between the gloom of the retailers and the credit crisis. The turmoil on Wall Street and the present trepidation on the high street are both driven by higher interest rates. What has alarmed retailers is the likely effect of higher UK interest rates on consumer spending as they feed through the system. When the cost of borrowing goes up, people tend to spend less in shops, especially if they are indebted. Rising interest rates around the world were the trigger for the global credit crisis too. The sudden inability of poor borrowers in America to meet their monthly mortgage repayments poleaxed financial institutions across the world that had foolishly bought up this dodgy debt.

Moreover, there is a real danger that these negative forces are beginning to feed off each other. As the Governor of the Bank of England, Mervyn King, pointed out yesterday, the mass re-pricing of risk taking place in the credit markets will eventually pass through to ordinary borrowers. This means the supply of credit open to households and companies is likely to tighten in the coming months. Ominously, Abbey became yesterday the first UK high street bank to raise its mortgage rates as a result of the credit crunch.

Stricter credit conditions are bearable for those who have a manageable amount of debt. The problem is that many of us in Britain have availed ourselves of vast and unwieldy amounts of credit in recent years. UK household debt is now greater than our annual GDP. If the cost of borrowing rises only slightly further, millions will find themselves unable to cope with the repayments on their unsecured loans and credit cards. There is also the specific effect of tighter credit on our own housing market to consider. Consumer spending is heavily reliant on buoyant house prices. If prices begin to fall because of more expensive mortgages, as they are in parts of America, consumer confidence could evaporate even more quickly, punishing retailers.

All this means our economy is looking distinctly more precarious than three months ago when the credit crunch began. But what should monetary policymakers be doing? There is a growing clamour from financiers for the Bank of England, the national lender of last resort, to cut interest rates and alleviate the effects of the credit crunch. Yet this pressure must be resisted. Oil prices remain high. Food prices are rising. Rates must remain where they are to keep a lid on inflation. Cutting them now would risk jeopardising the long-term stability of the economy. It would also create the "moral hazard" of bailing out those individuals and institutions that made poor or greedy decisions at the height of the credit bubble.

The track ahead looks bumpy, but it would be more irresponsible for monetary managers to slam on the brakes than to allow the train to roll on.