The Bank of England today rebuffed pleas for a new cut in interest rates as it pursued its campaign to quell persistent inflationary pressures in the economy.

In a blow to homebuyers and businesses struggling with borrowing costs that are still being driven upwards by the credit squeeze despite of previous base rate cuts, the Bank opted to stay its hand this month after April’s quarter-point decrease. In Europe, the European Central Bank also opted to keep interest rates unchanged at 4 per cent.

The noon verdict from the Bank's Monetary Policy Committee (MPC) fulfilled City predictions that base rates would be kept pegged today at 5 per cent, as the nine-strong rate-setting panel walks a tightrope between steep increases in the cost of living and faltering economic prospects.

Much of the City still expects, however, that the Bank will next month order its fourth quarter-point rate since April to underpin growth.

Economists predicted that, after signs of a growing split between hawkish and doveish factions on the MPC, the conflicting pressures it faces are likely to have left it sharply divided in this morning’s debate, to be detailed in minutes in a fortnight.

One member, Professor David Blanchflower, the MPC’s arch-dove, is tipped to have called again for a half-point reduction in rates after sounding warnings last month over the danger of recession and a housing crash, and demanding aggressive action.

However, the MPC’s chief hawks, led by Professor Tim Besley and Dr Andrew Sentance, are expected to have argued forcefully for base rates to be kept on hold while the Bank fights inflationary dangers from soaring costs for food and energy.

The Bank’s detailed assessment of the risks facing the economy and its latest forecasts of the outlook will be laid out next week by Mervyn King, the Governor, in its quarterly Inflation Report. That is expected to see the MPC raise its view of likely inflation levels over the next 12 months, and perhaps beyond.

Ahead of today’s disappointing news for anxious households and businesses, pressure for a back-to-back rate cut was fuelled by a spate of bleak indications that a downturn in the economy in taking firmer hold, while the mortgage market remains blighted by a home loan drought.

The head of the country’s biggest building society gave warning yesterday that the £50 billion-plus lending lifeline for banks created by the Bank of England and Treasury to ease credit strains had yet to make any difference to mortgage market conditions.

Although Mr King insisted last month that the £50 billion scheme is not intended as a “cure-all” for the home loans shortage, expectations have still run high that it would help to ease the plight of those struggling to secure a mortgage, or facing more expensive terms for what is available.

But Graham Beale, chief executive of the Nationwide Building Society, told The Times yesterday that little improvement has been seen so far, and cautioned that a cut in base rates today would also have made scant difference, as lenders continue to confront severe funding stresses.

Fears over the fallout from the mortgage logjam and its toll on the wider economy were inflamed in recent days after Nationwide reported that house prices fell for a sixth month in a row in April by 1.1 per cent, while Halifax, the biggest mortgage lender, reported a still larger 1.3 per cent drop.

Mr King has also insisted that he is “sanguine” over the knock-on impact on consumers. But official figures show retail sales fell by 0.4 per cent last month, while industry reports point to a retreat by shoppers from the high street.

Anxieties over a darkening economic outlook have been further reinforced this week as a key survey has shown growth in the services sector, accounting for the lion’s share of national income, all but grinding to a halt last month, while manufacturing output suffered a surprise 0.5 per cent fall in March.

MPC members led by Mr King have made clear, however, that they cannot simply abandon their official mission of combating inflation to prop up growth.

The Bank’s inflation concerns have been aggravated by a renewed surge in crude oil prices, soaring prices for foodstuffs on world markets, and a sharp slide in the pound, which drives up Britain’s import bills.

Record oil prices have sent the cost of petrol above £5 a gallon for the first time, while families are being shaken by jumps in bills for their weekly shop at supermarket checkouts.

Yesterday, sterling fell to two-and-a-half month lows against the dollar of $1.0518, and it has recently set all time lows against the euro.

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