The Bank of England should spurn calls for action today to shore-up the faltering economy and keep interest rates on hold in a show of its determination to quell soaring inflation, The Times Monetary Policy Committee recommends this morning.

Despite a barrage of dire figures that have fuelled fears of a looming recession, the influential Times panel of economic experts voted by eight-to-one to recommend that the Bank holds its fire today.

Amid mounting City speculation that the Bank could even raise interest rates, at least three members of the Times MPC argued that the severity of inflation dangers was enough to make a rate increase a serious option.

The intensity of the dilemma for the Bank's own Monetary Policy Committee as its confronts conflicting pressures from a rapid downturn in the economy combined with increasing inflationary pressures were spelt out starkly by Rupert Pennant-Rea, the Bank's former deputy governor.

“This is a two-handed economist's dream and the MPC's nightmare,” he said. “There is no simple or painless way out of this dilemma. Britain will have a recession. The recession is unavoidable. It is now the only way to bring inflation back under control.” Mr Pennant-Rea backed the view of other panel members that a deep impending downturn would be enough to quell inflation without rate rises.

His conclusion was echoed by Charles Goodhart, the Times panel's new member. He argued that with inflation rising sharply and the public's expectations of a rising cost of living threatening to stoke inflationary pay demands, the “standard remedy” would be a rate rise.

The Bank needed to show its “willingness to exhibit tough courage” and readiness to raise rates, he said. However, he said that rates should be held as the threat of wage growth accelerating would be forestalled by the latest bleak developments. “The housing market is collapsing. Consumer confidence has sunk, and recession appears ever closer,” he said.

Martin Weale, director of the National Institute of Economic and Social Research, also argued that “with inflation well above target and inflationary expectations having risen, a good case can be made for raising the interest rate”. That would show the Bank's determination to control inflation. Yet Mr Weale, too, said that the Bank should stay its hand for now, since without the surprisingly strong high street spending recorded in May, the economy would have all but ground to a halt.

Sir Steve Robson, former second permanent secretary to the Treasury, shared this analysis. He said that the key issue was whether the slowdown would prevent wage demands taking off, despite rising expectations of future inflation. On this, he said that the omens were worrying, yet the Bank could wait before resorting to a rate rise, “but not too long”.

The rest of The Times panel were less hawkish, with Sushil Wadhwani, a former member of the Bank's MPC, alone in backing a rate cut this month. He saw little risk of wages taking off and predicted that inflation would fall back even if record commodity prices persist.

Dr Wadhwani said that the Bank was underestimating the toll of consumer spending from falling house prices and noted that rising market interest rates meant that conditions were much tighter than implied by the 5 per cent official base rate.

Anatole Kaletsky, The Times's chief economics commentator, said that the weakness of the economy argued for lower rates but that the Bank had to hold fire to guarantee its credibility.

Bronwyn Curtis, chairman of the Society of Business Economists, agreed that pay deals would stay muted. “With consumer confidence at an all-time low and house prices falling, most employees will be more concerned about keeping their job than pushing for higher wages,” she said.

Sir Alan Budd, former chief economic adviser to the Treasury, said that there should be few “second-round effects”, where higher living costs spark big wage increases.

Geoffrey Dicks, of Royal Bank of Scotland, said that for the MPC to follow the lead of the European Central Bank last week and raise rates could end up looking “very ill-conceived ... In due course, the slowdown in the economy will get on top of inflation and allow the MPC to cut rates, but we are not there yet.”

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