The Bank of England will move only slowly to cut interest rates, in spite of new official figures showing that Britain’s economy has ground to a halt.

While the figures surprised analysts, and showed that Britain’s 16-year expansion came to an end in the second quarter, the Bank’s monetary policy committee (MPC) had been braced for a downward revision of the gross domestic product (GDP) data and hinted at it in its inflation report published earlier this month.

Only if third-quarter GDP figures show a big drop would the Bank’s view of the growth outlook be significantly altered. The Bank said in the inflation report that GDP should be “broadly flat” in the July-September quarter.

Weak figures could still pave the way for a rate cut later this year, with some analysts pencilling in a reduction in November.

However, a survey of economists by Ideaglobal.com, the financial-research company, showed a median expectation that Bank rate will still be 5% at the end of the year, though a minority think the rate could be as low as 4.5%.

No analysts expect a rate hike, despite a vote for an increase this month by MPC member Tim Besley. Analysts expect inflation to peak in October at 4.8%, slightly below the rate of 5% or more expected by the Bank.

The details of the official GDP figures suggest that weak activity should bear down hard on inflation, with firms finding it tough to pass on cost increases in higher prices.

Domestic demand has fallen for two consecutive quarters and, according to Allan Monks, an economist at investment bank JP Morgan, is falling at its fastest rate since 1991, the middle of the last recession.

“With inflation running high, the middle-ground members of the MPC appear unlikely to vote to reduce rates unless market expectations for a cut are widespread,” he said.

“But downside risks to already downbeat views on activity continue to build and we continue to expect rates to begin to fall later this year.”

The GDP figures came after data showing a surprise increase in retail sales last month, but economists think consumer spending, which dropped by 0.1% in the second quarter, will remain under pressure.

The only area of growth in the second quarter was the services sector, which expanded by 0.2%. The CBI’s closely-watched survey of business services will be published this week and is likely to show further weakness.

A survey of 736 firms by Siemens Financial Services shows that 25% have experienced an increase in borrowing costs as a result of the credit crunch and a further 15% have been informed by their banks that increases are on the way.

Also this week, Nationwide’s monthly index of house prices is predicted to show a further significant drop, with both activity and prices hit by uncertainty over whether the government will introduce a stamp-duty holiday.

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