Rates kept at 5%

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

Policymakers had 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 values fell by a further 2.4 per cent in May, making the annual drop nearly 4 per cent - the fastest rate of decline since 1993.

The 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, unless it becomes clear that the economy is deteriorating sharply, the Bank is right to continue its cautious approach."

Investec chief economist Philip Shaw said the decision was no surprise, particularly after oil prices peaked at US$135 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."

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