The Bank of England kept interest rates on hold at 5 per cent today, despite widespread expectations that the country is set to enter a recession in the second half of the year.

It is likely that while a rate cut was discussed among the Bank's Monetary Policy Committee (MPC) members, their hand was stayed by rising inflation, which hit a 16-year high of 4.4 per cent last month and is set to increase further.

Today's decision will come as a blow to homeowners, struggling with high mortgage costs, who have seen more than £25,000 wiped off the value of their homes in the past year.

The price of the average home plunged by 12.7 per cent to £174,178 in the year to August, down from nearly £200,000 in August last year, according to new figures from Halifax, the mortgage lender.

The average mortgage rate for a borrower with a 10 per cent deposit. or 10 per cent equity in their home. is around 6.5 per cent, much higher than the base rate of 5 per cent.

David Blanchflower, the arch-dove on the MPC, has already hinted that he would vote for aggressive cuts this month to boost the economy, but analysts said that other committee members would rather wait until there is evidence that inflation is starting to fall before moving for a reduction.

The Bank has forecast that inflation will peak at 5 per cent by the end of the year before falling sharply, opening the way for future cuts in the interest rate.

However, there is increasing pressure for the Bank to take more urgent action over the stagnant economy.

Earlier this week, the Organisation for Economic Co-operation and Development (OECD), an influential think-tank, said that the British economy would shrink in the final two quarters of the year, pushing the country into a technical recession.

In a further embarrassment for Gordon Brown, the UK will be the only country of the leading G7 nations to be in recession at the end of the year, according to the OECD.

Howard Archer, chief UK and European economist at Global Insight, said: "Despite the very real danger of recession, it was always likely to prove premature for the Bank of England to cut interest rates, given well above target and rising inflation, still significant medium-term inflation risks and the weakness of the pound.

"Nevertheless, the minutes of the MPC meeting should make very interesting reading when they are released in two weeks time to see if the committee has shifted further towards cutting interest rates."

Alun Powell, senior economist at HSBC, said hopes of an imminent rate cut were rising. "We certainly expect the MPC to cut rates over the next month or so, which would provide welcome relief to many homeowners."

Meanwhile, the European Central Bank also left eurozone interest rates on hold at a seven-year high of 4.25 per cent.

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