Any lingering hope that the Bank of England might try to revive the half-dead mortgage market with a near-term cut in interest rates were killed off by yesterday's ghastly inflation figures.

The 3.8 per cent rise in June was much worse than expected and the increase was not just driven by fuel and food. Core inflation, which excludes these, edged up to 1.6 per cent.

Mervyn King, the Bank Governor, has already given warning that inflation is likely to top 4 per cent, twice its target. The way things are going the spike may be even higher than expected.

So most economists now think the Bank will not risk a cut in rates until next year in spite of the mounting concerns about the economy as a whole and the housing market in particular.

Not that a cut in rates would necessarily do much to rekindle the sputtering mortgage market.

Mortgage rates remain stubbornly high compared with official rates, as nervous banks continue to rein back lending. Mortgage lenders have been pinning their hopes on Sir James Crosby, who was asked by the Chancellor to look at ways of tackling funding shortages in the mortgage market.

But the industry has been dismayed by indications that Sir James's interim report, expected within a few weeks, will not contain any concrete recommendations.

In frustration, the Council of Mortgage Lenders yesterday published its submission to the review which calls for the Bank of England to provide more support for mortgage lending.

The council points out that the special liquidity scheme launched by the Bank in April has done little to increase the flow of funds to the housing market or lower their cost, as predicted by the Chancellor (though not by the Bank itself).

In terms of possible solutions, the council says it has not “ruled out” a state-sponsored mortgage funding entity. But we can fairly safely assume that that is precisely what the Government has ruled out. If it hadn't before, it will now, having seen the terrible mess the Americans have got into with their state-sponsored entities, Fannie Mae and Freddie Mac.

The US Administration's efforts over the weekend to support Fannie and Freddie without actually providing any support seem to have backfired. Their share prices tumbled again yesterday and the Government's intervention only seemed to spook the markets further, driving the dollar to a record low against the euro.

Instead of a new mortgage funding entity, the council is proposing a facility where the Bank of England would lend money against new mortgage-backed securities bought from the original lenders.

The idea was considered and rejected by the authorities last autumn and the Bank of England is thought to remain firmly opposed. It argues that by stimulating new mortgage loans it could encourage the return of irresponsible lending.

Struggling housebuilders are backing the council plan, saying that it is not an option to wait until the end of the year, when Sir James's final report is due.

But such a delay might actually be sensible. There is increasing evidence that house buyers are now being put off as much by the prospect of falling prices as the lack of mortgage finance.

The faster house prices fall, the faster they will reach a bottom and the faster the level of transactions, which is so important for the broader economy, can return to normal. Of course, there are risks of an overshoot and serious collateral damage. But such a short, sharp shock would also help to get inflation back in its box.

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