Interest rates held at 5%

Sep 4 2008 By Alex Turner

THE Bank of England's monetary policy committee has today kept interest rates at 5% for the fifth month running.

Unions and business leaders had earlier made fresh demands for interest rate cuts as they called on the Bank of England to combat growing recession fears.

Despite an economy in its worse state for 16 years, the committee has kept rates unchanged due to inflation fears.

But the TUC’s head of economics and social affairs Adam Lent said: "The recent spate of bad economic news shows that the great danger is recession, not inflation.

"With little domestic pressure on prices, the Bank must start to cut interest rates aggressively or the slowdown will be far worse than it needs to be."

Rate-setters are currently grappling with inflation more than double its official 2% target at 4.4% - fuelled by oil food and energy prices - and set to peak at 5% or more in the months ahead. A weaker pound is adding to the pressure.

But the BCC’s economic adviser David Kern said the MPC should act to cut rates in October or November when inflation came to a head.

He said: "The economy urgently needs an interest rate cut to counter threats of recession."

Splits among the bank’s rate-setters have become more public in recent weeks as Prof David Blanchflower called for immediate rate cuts and called his committee colleagues "misguided" for their focus on inflation.

He was hitting back at a newspaper article by fellow committee member Tim Besley, who warned that letting inflation get out of control would be "damaging and dangerous to the economy" and herald a return to the 1970s.

But more evidence of the slowdown has been given in survey data published this week which showed manufacturing, services and construction activity shrinking in August, despite registering slight improvements from July’s lows.

Housebuilding has meanwhile seen steep declines because of the impact of the credit crunch on mortgage availability, while the CBI business group said high street retailers have had a "summer to forget".