The Bank of England today spurned pleas for a new cut in interest rates to shore up the faltering economy and slumping housing market and held them at 5 per cent.

The harsh noon verdict from the Bank’s rate-setting Monetary Policy Committee (MPC) dealt a fresh blow to hard-pressed households and businesses, fearful of rapidly worsening economic prospects and struggling with mounting financial strains.

Its decision came as a further blow to homeowners after Halifax this morning reported that house prices fell by 2.4 per cent or £4,000 in May to £184,111.

It was the second biggest monthly fall on record, after prices slipped by 2.5 per cent in March.

Analysts said the new figures were alarming. House prices have fallen by 6.6 per cent in the first five months of this year, more than the total decline in prices during the whole of 1992.

The housing market has been hit hard by a lack of mortgages vailable to new buyers. Recent figures from the Bank of England show that loans approved for house purchases has slumped to a record low.

The Bank’s tough decision to keep rates pegged for a second month in a row came as it stuck to its recent hard line that it must prioritise its battle to tame rising inflation, stoked by soaring food and fuel prices.

The MPC had been widely expected by the City to rebuff the growing clamour for a fresh cut in official base rates after it forecast last month that headline consumer price inflation will rise over the summer to almost 4 per cent, as food and energy costs continue their upward charge.

The Bank gave warning that inflation would take two years to fall back to its 2 per cent target, even if base rates were pegged at present levels.

Mervyn King, the Governor of the Bank of England, emphasised the Bank’s predicament with hawkish warnings that he is likely to have to write a series of letters to the Chancellor, explaining why inflation has risen more than 1 percentage point above target and stayed stubbornly high.

After inflation jumped to 3 per cent in April, economists think Mr King will have to write the first of these explanatory letters as soon as this month, when May inflation figures are released.

Inflationary pressures are being inflamed by a sharp fall in the pound of more than 10 per cent over the past year, which is driving up Britain’s import bills, and as businesses try to deal with the squeeze on their profits from rising costs by increasing prices at record rates.

The Bank’s verdict will spark anguish among households struggling with steep rises in the cost of living, would-be homebuyers facing dearer mortgage rates, and homeowners coming off cheap, fixed-rate loan deals, who are facing much higher monthly repayment costs, as well as anxious businesses. In spite of past base rate cuts, loan rates have continued to rise as high street banks react to a shortage of funding triggered by the global credit crunch

The MPC’s decision today came despite the issue of new warnings over a fast deteriorating outlook and mounting signs that the economy is sliding into the grip of a severe downturn.

Yesterday the Organisation for Economic Cooperation and Development (OECD) said that Britain faces a grim two-year stretch of weak economic growth. The think-tank said that it expected house prices to drop by 10 per cent by the end of next year, unemployment to creep upwards, and consumer spending growth to stall.

In the latest challenge to Alistair Darling’s prediction that the economy will rebound strongly next year from only a modest slowdown in coming months, the OECD forecast that growth in 2009 will be even weaker than this year, at just 1.4 per cent. That compares with the Chancellor’s bet that growth will bounce back to rise by between 2.25 and 2.75 per cent next year, from his expected minimum of 1.75 per cent for this year.

Fears that the economy is rapidly losing steam were reinforced yesterday by a key survey of the services industries, which suggested that growth in the economy’s dominant sector stalled last month for the first time in more than five years, with services businesses cutting jobs at the fastest pace for more than a decade.

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