UK interest rates have been held at 5% as the Bank of England decided to focus on inflation risks, despite signs that the economy is slowing.

The rate freeze had been expected, although many analysts now predict that rates will be cut to 4.75% in June.

The decision came despite a flurry of downbeat data which added to worries about the state of the UK economy.

However, rising fuel and food prices means that inflation is ahead of the government's target.

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'Recession risk'

"The latest data shows the economy is slowing, albeit only gradually, and at the same time inflationary pressures continue to mount," said Ian McCafferty, chief economic adviser to the CBI business group.

"The Bank faced a difficult decision, but it is no surprise that rates were kept on hold this month."

Meanwhile the body representing Britain's manufacturers, the EEF, said that the decision to hold rates was only delaying the inevitable cuts.

"The economy has been through a series of shocks since the credit crisis hit last summer and the Bank has been right so far in responding with a measured approach on rates," said the EEF's chief economist, Steve Radley.

"However, despite concerns on inflation, further cuts to interest rates are needed to prevent the economy from drifting towards recession."

The British Chambers of Commerce (BCC) argued that a rate cut would have underpinned business and consumer confidence and helped limit the potential damage to the economy.

"This decision was a mistake given the serious threats to economic growth," said BCC adviser David Kern.

Roger Bootle, economic adviser to Deloitte, said that by leaving the rate on hold, the Bank's Monetary Policy Committee (MPC) risked "presiding over the deepest and longest economic downturn since the recession of the early 1990s".

Mr Bootle predicted that rates would fall to 3.5%, or possibly lower, but that the moves would be "too late to prevent the economy from flirting with recession".

Speculation

Homeowners had been hoping for rate cut which - if it had been passed on by lenders - may have seen some people's mortgage payments reduced.

However, the credit crisis has made funding mortgages trickier for banks, and when interest rates were cut to 5% from 5.25% last month, not all lenders passed on the full reduction to borrowers, despite government pleas.

Negative manufacturing and service sector data released this week had led some to speculate that the Bank might decide to cut rates this month.

Office for National Statistics data showed that manufacturing output fell by 0.5% in March, the sharpest rate of decline in six months.

The figures followed data released earlier this week by the Chartered Institute for Purchasing and Supply which suggested that the UK services sector grew at its slowest rate in nearly five years in April.

The most recent available data showed that Consumer Prices Index inflation was 2.5% in March, holding steady from February, but well ahead of the government's 2% target.

On Wednesday, the British Retail Consortium said food prices in April were up 4.7% compared with a year ago, although falling prices of non-food items meant that shop prices overall were up by 1.2%.

(BBC)

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