MPC holds interest rates at 5.75% as inflationary pressures mount

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The Bank of England's Monetary Policy Committee yesterday held base rates at 5.75 per cent, defying calls for a reduction from the property sector and analysts worried about the impact of the global credit crunch on the UK economy.

The MPC, which last month voted eight to one for leaving rates on hold, will not give its reasons for the latest decision until the minutes of its meeting are published in several weeks' time, though next week's quarterly Inflation Report from the Bank of England should provide more clues to its latest thinking.

However, it is likely that concern about the inflationary effect of rising energy prices in a week in which the price of oil has come close to $100-a-barrel was sufficient to outweigh the MPC's concerns about a slowdown in the economy.

Trevor Williams, the chief economist at Lloyds TSB, said: "Although it is true that economic growth may have peaked in the last quarter and is slowing in the current one, there is still some way to go before the MPC would need to wield the knife on base rates."

Nevertheless, many economists believe an interest rate cut is now inevitable, following a series of surveys in recent weeks that have painted a downbeat picture of the UK's economy. In particular, the British Retail Consortium said this week that consumer spending in October was at its lowest level for a year. Housing market analysts are also concerned that five interest rate increases have begun to damage the mortgage sector.

The MPC's decision was announced just hours before Ben Bernanke, governor of the US Federal Reserve, warned that the US economy was set to slow markedly before the end of the year, as the effects of the sub-prime mortgage crisis on credit markets filtered through. In evidence to the US Congress, Mr Bernanke predicted "financial restraint on economic growth as credit becomes more expensive and difficult to obtain".

Paul Niven, the head of asset allocation at F&C Investments, said Mr Bernanke's warnings would eventually be heeded in the UK and in Europe, where the European Central Bank also kept rates on hold yesterday.

"The US Federal Reserve is the one leading the way in cutting rates but with cracks appearing in the previously benign economic outlook, it is now only a matter of time before the other major central banks follow," he said.

Ian Kernohan, an economist at Royal London Asset Management, added: "I suspect more than one MPC member voted for an immediate reduction in rates this time – further weakness in the data and growing concern about the fallout from the credit crunch should be enough to provoke a rate cut next month."

The Bank of England is still trying to assess what exposure British banks have to the credit crisis, with Mervyn King, the governor, warning earlier this week that it would be several months before the picture became clear. Yesterday, it emerged that Northern Rock, the major UK casualty of the crisis, had borrowed an additional £500m from the Bank over the past week.