Interest rate held at 5%

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The Independent Online

Interest rates were pegged at 5 per cent today as the Bank of England continued its fight to keep a lid on inflation.







Policymakers have little scope to reduce rates after the Consumer Prices Index hit 3 per cent amid fears that inflation could move higher in coming months. Economists said there was no guarantee that interest rates will be cut at all this year.



The Bank's vote against a cut came despite gathering gloom over the UK housing market and wider economy.



House price figures from the country's biggest mortgage lender Halifax revealed today that values fell by a further 2.4% in May, making the annual drop nearly 4% - the fastest rate of decline since 1993.



Today's news will come as a blow to those homeowners in need of relief from rising petrol, mortgage, food and energy bills.



David Kern, economic adviser to the British Chambers of Commerce, warned this week that lack of action by the Bank increased the risk of "a severe but needless economic downturn" later on.



Most business lobby groups supported the decision in the face of difficult economic conditions.



CBI chief economic adviser Ian McCafferty said: "The Bank had little option this month other than to leave interest rates on hold - oil and commodity prices are still of great concern and businesses are having to raise prices as profit margins get squeezed further.



"We have yet to reach the peak in inflationary pressure, but the rate of inflation is still expected to start to fall back markedly in 2009."



Steve Radley, chief economist at manufacturers' organisation EEF, said: "Given the current extent of inflationary pressures, the Bank faces an unenviable dilemma in balancing further signs of weakness with growing concerns over inflation. But unless it becomes clear that the economy is deteriorating sharply, the Bank is right to continue its cautious approach."



A cut to 4.75% was on the cards only weeks ago, with data suggesting that the slowdown in the economy was gathering pace.



The Bank's Monetary Policy Committee (MPC) is charged with keeping inflation at around 2%, but the measure hit 3% in April and is likely to remain above 3% until well into next year - potentially prompting a series of open letters from Governor Mervyn King to the Chancellor explaining the rise.



The Bank warned last month that inflation could even spike as high as 3.7% this year.



Investec chief economist Philip Shaw said today's decision was no surprise, particularly after oil prices peaked at 135 US dollars a barrel last month.



He said: "The MPC faces an extremely difficult situation where the economy looks as if it's going to slow, while inflation will continue to rise and in all probability rise sharply, at least in the short term.



"Next year we hope will be very different, with inflation beginning to fall sharply, which should allow the Bank to bring rates down."



Paris-based economic experts at the Organisation for Economic Co-operation and Development (OECD) slashed forecasts for UK growth yesterday, cutting predictions for GDP from 2% to 1.8% in 2008 and to 1.4% from 2.4% in 2009 amid weakening house prices and tighter credit conditions.



The slowdown in the economy is expected to bring inflationary costs down, as demand and spending eases back.



There are already strong signs that UK consumers are feeling the pinch, with figures last week showing that consumer confidence dived to its lowest level for nearly 18 years last month on fears of a looming recession.

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