Homeowners struggling amid the credit crunch were given no relief today after policymakers voted to hold interest rates at 5 per cent for the fourth month in a row.
The decision by the Bank of England's Monetary Policy Committee (MPC) is likely to have been one of the toughest in recent times, with members having to balance deeper economic gloom with expectations of rising inflation.
Most economists believe rates will remain on hold for the rest of the year, although a rate rise cannot be ruled out as inflation may hit 5% this autumn, pushed higher by the latest round of gas and electricity tariff increases.
The warning comes despite mounting signs of recession and gloom in the housing market. Britain's biggest mortgage lender, Halifax, today revealed that property values had fallen by 8.8% in the past year after sliding a further 1.7% in July.
Borrowers are finding it increasingly difficult to keep up with repayments, with home repossessions rocketing by 40% in the first three months of the year, according to Financial Services Authority figures earlier this week.
However, homeowners may find some welcome relief as lenders move to reduce rates in spite of the no-change in the Bank base rate. Nationwide today announced interest rates cuts on some of its fixed rate products.
A number of other lenders have already made rate cuts on mortgage products - including the Woolwich and Lloyds TSB and its mortgage arm Cheltenham & Gloucester - in a sign that the peak in borrowing costs may have passed.
Businesses today said the Bank was right to leave rates on hold.
CBI director general Richard Lambert said: "The latest data show the slowdown in UK economic activity gathering pace, and business and consumer confidence falling further.
"However, with inflation heading higher in the next couple of months, the Bank is right to leave rates on hold for the time being."
Manufacturers also said they accepted the decision, but added that the case for a cut was growing.
The manufacturing sector saw activity fall at its fastest pace for nearly a decade during July, according to figures earlier this week, which suggested gathering woes in the wider economy.
Lee Hopley, head of economic policy at manufacturing organisation EEF, said: "The MPC continues to be pulled in opposing directions by rising inflation and slowing growth. However, the balance of risk appears to be shifting more rapidly - a cut in interest rates may be needed sooner rather than later to prevent the economy from drifting towards recession."
The Bank cut rates in April and has since had its hands tied by the conflicting pressures of a looming recession and rising inflation.
Steep rises in energy bills, such as British Gas's record hike last week, have added to inflationary concerns.
The MPC is charged with keeping inflation at the Government-set target of 2%.
The official rate of inflation, the Consumer Prices Index (CPI), has soared far above this target. It is now at 3.8% and is due to surge further in coming months, possibly as high as 5% or more.
The MPC is expected to have had a preview of the July inflation data ahead of its rates decision later today, with economists pencilling in a rise in CPI to 4% or even higher.
The International Monetary Fund (IMF) yesterday warned the Bank had "little scope" to cut rates to ease the slowdown as it reduced its UK growth forecasts to just 1.4% in 2008 and 1.1% next year.
Philip Shaw, chief economist at Investec, said: "We are not surprised that rates remained at 5% - we feel that with inflation rising over the next few months possibly to up to 5% in the autumn, the MPC was unable to give the economy any relief via lower rates, but we are happy it had resisted the temptation to raise rates."
Ernst & Young predicted that lower oil prices, which have recently fallen to around 120 US dollars a barrel, combined with the help from a slowing economy, may see inflation ease later this year.
"With the significant drop in the oil price over the past few weeks, combined with an easing of inflationary pressures as spare capacity in the economy increases, the Bank could cut rates as early as November," said Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club.Reuse content