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By Lee Wild

Date: Thursday 04 Sep 2008

LONDON (ShareCast) - There was no reprieve for hard up borrowers today when the Bank of England confirmed expectations by keeping interest rates at 5% for the fifth month in a row.

Even news of a 12.7% plunge in house prices from the Halifax and a widely predicted recession were not enough to outweigh concerns about runaway inflation.

Inflation is now more than double the government’s 2% target after soaring to 4.4% in July on further increases in the cost of food and stubbornly high fuel prices. Annual shop price inflation now stands at a record 3.8%.

But the central bank offered hope last month that the next move in rates will be down when governor Mervyn King warned of “flat” growth and predicted that inflation will peak at 5% before falling next year.

It is thought that Monetary Policy Committee member and perennial dove David Blanchflower voted for lower rates again at today’s meeting. In an interview last week he called for a big cut to help avert a full scale recession.

Policymakers were split three ways at August’s get together, with hawkish Professor Tim Besley voting for a quarter point hike in borrowing costs to 5.25%.

But Chancellor Alistair Darling has since warned that the current economic crisis is the worst in 60 years.

That frank admission came shortly after a warning from the Organisation for Economic Co-operation and Development (OECD) that Britain will fall suffer a recession this year.

The Paris-based think tank reckons the UK economy is set to contract at an annual rate of 0.3% during the third quarter, then by 0.4% in the final quarter of 2008. A technical recession is defined as two quarters of negative growth.

Last month’s Office for National Statistics data showed the economy ground to a halt between April and June, prompting calls for the Bank to cut rates.

Annual growth was the weakest since the end of 1992, having been revised down from 1.6% to 1.4%, the same as predicted by the International Monetary Fund. The OECD cut its forecast to just 1.2% from 1.8%.

Howard Archer, chief European & UK economist at Global Insight, thinks interest rates will be cut from 5% to 4.75%, probably in November, rather than in early 2009 as previously expected.

But that is expected to open the floodgates for a rapid drop to a low of 3.5% next year “as extended very weak economic activity contains and then increasingly dilutes underlying inflationary pressures.”

Edward Menashy, chief economist at Charles Stanley, also thinks rates may drop in November as falling commodity prices cause inflation to peak at 5% in September or October.

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