Hopes that the Bank of England will swiftly follow today's interest rate cut with a back-to-back reduction next month have been undermined by new evidence that inflation is tightening its grip across the economy.

New figures show that more companies in both the services and manufacturing sectors are raising prices than at any time for a decade, while steep falls in the pound mean import prices are rising at their fastest for nearly 15 years.

Anxieties that inflation could be taking root in the economy will be further inflamed by the first serious indications today that widespread price pressures and steeply rising living costs are starting to stoke pay pressures - a key fear for the Bank of England's Monetary Policy Committee (MPC).

After the MPC coupled today's widely-expected quarter-point cut in the interest rate to 5 per cent with a hawkish statement that focused heavily on inflation risks, the developments dealt a heavy blow to business and City hopes of another, swift cut in borrowing costs to bolster growth.

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BACKGROUND

• High street slows ahead of rate cut hopes

• Housing market: case studies

• The one certainty is the uncertainty

• Best thing is to sit tight and watch it on TV

Related Links

• Full text of Bank of England statement

• Will my mortgage rate fall?

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• Grainne Gilmore on the interest rate cut

The Bank's statement announcing its second cut in base rates this year emphasised the MPC's need to balance the mounting risks to growth prospects from the credit squeeze and deepening housing downturn with persistent inflationary dangers.

The yet deeper dilemma confronting the Bank after today's figures will fuel speculation that it will now be loathe to cut rates again next month.

The intensity of cost and prices pressures in the corporate sector was highlighted as the British Chambers of Commerce (BCC) authoritative poll of companies nationwide showed the proportion of both manufacturing and services companies planning to raise their prices over the next three months reaching the highest levels since 1997, when the survey began.

The results showed that a 42 per cent more manufacturing business planned to increase prices than intended cuts. In the services sector, a net 43 per cent planned price rises.

Worryingly for the Bank, there were signs in the BCC findings that, with many businesses in the survey citing financing costs as a key pressure, the credit squeeze itself is now fuelling inflation even as it saps activity in the economy.

There was scant comfort for the MPC over inflationary trends in the latest trade figures. After the pound this week sank to new record lows against the euro, with the single currency reaching an all time high of 80.29p today, the official data showed that import prices are soaring as sterling slides.

Prices for imported goods jumped by 1.2 per cent in February alone, lifting the annual pace of increase into double-digits at 10.4 per cent - the highest since September 1993.

The renewed surge in oil prices, which saw crude at levels above $110 a barrel today, is fuelling import price inflation. But even after stripping out oil costs, import prices rose at an annual 5.9 per cent in February, up from 5.1 per cent in the previous month.

A further concern for the MPC in today's data is over wage pressures. Until now, there has been little sign of pay demands taking off, despite soaring living costs from dearer food and energy bills.

However, a key survey of pay settlements from Incomes Data Services (IDS), the consultancy, suggested that this benign trend is under threat, with indications of mounting pay pressures this month, a crucial one for wage agreements.

IDS said that pay deals in the first quarter were stuck at similar levels to last year, at about 3.5 per cent, but that settlements have risen in April to higher levels. Two-thirds of pay awards analysed from this month were for 4 per cent or more, the figures showed.

Although some of these deals are the latest phase of previously agreed long-term packages, IDS said that new one-year and longer-term deals were also being settled at higher levels.

These trends will add to the headache for the MPC, which has fretted for months that higher headline inflation, and expectations of more price increases to come, would spark a wage-price spiral.

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