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Band Of England Told To Hold Interest Rates

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The Bank of England today dashed the hopes of hard-pressed families and businesses for action to boost their strained finances and the economy by keeping rates unchanged at 5 per cent.

Spurning pleas for a new cut in interest rates to stem the growing threat of Britain sliding into recession, the Bank kept interest rates on hold for a third month in a row.

The hardline verdict by the Bank’s rate-setting Monetary Policy Committee (MPC) came as it pursued its campaign to quell rising inflation stoked by soaring prices for fuel and food.

FTSE 100 stocks barely reacted to today's decision, with the index maintaining this morning's decline at 94.1 points to 5,435.5.

The tough decision from the nine-member MPC came despite a blizzard of dire economic news over the past weeks, which has seen danger signals of recession flashing red in the City and across the country.

The deluge of bleak economic figures in recent days has led City experts to sound warnings that a severe downturn in Britain into next year is all but inevitable.

Evidence that the economy is already in the grip of a serious slump has piled up, with house prices tumbling, falling spending power for families, increasingly grim trading conditions for household name retailers such as Marks & Spencer, and a steep drop in leading shares that has taken them to the cusp of a new “bear market” for investors.

This week, an influential survey from the British Chambers of Commerce showed sales, orders, and confidence levels across the vast services sector, covering three-quarters of the economy and spanning businesses from cinemas and bars to accountants and lawyers, already at their worst since the last recession.

Conditions in manufacturing were also the worst since 2001, in the aftermath of the September 11 attacks on the United States, the BCC’s influential research indicated.

The dismal findings echoed earlier figures in key purchasing managers’ surveys last week which showed that the manufacturing, services, and construction industries all shrank during last month — the first time all three sectors have declined at the same time since 2001.

The services sector, the engine room of the economy, saw its growth succumb to the sharpest slump since that time.

Polls show that consumers’ fears over the fate of the economy have now sunk to levels even worse than those reached during the last recession in the early 1990s, as families face an increasingly painful squeeze on their finances alongside the deepening slump in the housing market and the tumbling stock market.

House prices tumbled by a further 0.9 per cent in June, falling for the eighth month in a row to stand 6.3 per cent down on a year earlier — their steepest annual decline since December 1992.

Official figures showed that Britons’ real household disposable incomes — the amount of take-home pay left after taxes, increased interest bills, and inflation are accounted for — fell by 1 per cent in the first quarter of the year, the sharpest drop since autumn 1999.

The blow led families to resort to drastic curbs on their savings, with the amounts being saved falling to the lowest since 1959.

Fears of still worse to come have further increased with unemployment having risen for four months in a row, fuelling anxieties that numbers out of work could soar as the downturn hit home still harder.

Despite these woes, the MPC had been widely expected in the City to resist pressure to ease the cost of borrowing as its concentrates its attention on its official mission to keep inflation under firm control, and in line with the 2 per cent target set by the Chancellor.

The dilemma from the Bank from stuttering growth and rising inflation reached its most severe so far last month as consumer price inflation climbed to 3.3 per cent in official May figures, forcing Mervyn King, the Bank’s Governor, to write an explanatory letter to the Chancellor. Mr King has to write such a letter each time inflation falls more than one percentage point above or below the target.

The Bank’s inflationary headache is being made yet worse as oil prices continues to set new record highs, having breached the watershed of $140 a barrel.

Inflation is also being fuelled by the sinking pound, which has fallen by 12 per cent over the past year, pushing up the cost of Britain’s imports. In May, import prices were up by more than 14 per cent from a year before.

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