A summer surge in inflation set to be sparked by soaring utilities bills means the Bank of England must rebuff calls for a cut in interest rates this week despite the economy’s deepening plight, The Times Monetary Policy Committee recommends today.

Despite mounting evidence from bleak economic figures that Britain is in the grip of a severe downturn, the influential Times panel of economic and financial experts voted by eight-to-one for a second month in a row to recommend that the Bank keeps rates on hold this month at 5 per cent.

With headline consumer price inflation set to leap to close to 5 per cent in the next few months following huge rises in gas and electricity bills, the Times MPC concluded that the Bank cannot afford to contemplate a rate cut to shore-up fast faltering growth.

Only one member of the group, Sushil Wadhwani, urged that interest rates be cut immediately to forestall what he saw as the growing risk of a “prolonged recession”.

However, the expert panel was split over whether an early interest rate rise might yet be needed to quell inflation, or whether the weakening in the economy now taking hold would prove enough to curb price pressures, leading to eventual interest rate cuts.

The divisions among the Times MPC reflect the qundary for the Bank as it confronts the conflicting pressures from the rapidly slowing growth and high and rising inflation.

“We are constrained by inflation, which is temporarily worsening, on one side, and by deflation, which is also worsening on the other. Not a comfortable position.” said Professor Charles Goodhart, a former member of the Bank’s MPC.

At least two members of the panel backed the view of the Bank’s Tim Besley last month that the scale of the present inflation danger could justify an immediate rate rise.

“I think there is a very good case for raising rates and keeping them at a higher level until inflation turns down again,” Martin Weale, director of the National Institute of Economic and Social Research, said. However, he said the Bank should hold fire for now in the light of recent falls in oil prices.

Sir Steve Robson, former Second Permanent Secretary to the Treasury, also said that rates could have to rise, but that the tight financial conditions in money markets, where market interest rates were well above base rates, meant they should be held this month.

Yet other Times MPC members argued that, with pay pressures remaining muted despite the rising cost of living, inflation should fall back next year, allowing the Bank to continue to hold fire on rates.

Bronwyn Curtis, chairwoman of the Society of Business Economists, rejected Professor Besley’s call for the Bank to act to ensure that companies and households did not come to believe that permanently higher inflation was inevitable and behave accordingly.

“I do not see the need for a quarter-point hike as a shot across the bows,” Ms Curtis said. “Wage growth remains muted on all measures and bargaining power should weaken further as demand falls.”

Geoffrey Dicks, chief UK economist at RBS Global Markets, agreed. “A hike would make the MPC look ivory tower and out of touch with the real world,” he said. “The next move will be down, but it is still some months away.”

Rupert Pennant-Rea, chairman of Henderson, the fund management group, and a former Bank Deputy Governor, also said that rates would eventually fall — but not yet.

“Only when inflation is clearly being tamed can the MPC consider cutting rates,” he said. He also backed Sir Steve’s view that the Bank also needed to keep close watch over the threat posed by the credit crunch “which shows no sign of easing and may even be getting worse”.

“Until the banks recover their health and their nerve, the economy will stay weak. That is the main reason why the MPC has no need to raise rates — and also why, at some point, its rate-cutting may have to be quick, and deep.”

Sir Alan Budd, former chief economic adviser to the Treasury, shared the view that an eventual interest rate cut would be appropriate, but also agreed that the Bank should stay its hand for now to ensure that inflation did not feed through into a “second round” of increases, and become entrenched.

But Dr Wadhwani argued that the UK economy was now already very weak and that rates should be cut immediately.

“Although headline inflation remains high, with an impending recession it is probable that wages will not respond materially. Even if commodity prices remain at their current high levels, headline inflation will subside. With the world economy now slowing, commodity prices have fallen significantly in recent weeks.

“If the MPC wait for headline inflation to subside before cutting rates, they increase the risk of a prolonged recession.”

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