Bank of England to freeze interest rates amid economic turmoil

LONDON (AFP) - The Bank of England was widely expected to leave British interest rates unchanged at 5.0 percent on Thursday as it seeks to tackle both soaring inflation and slumping economic growth, analysts said.

While Britain's economy was in desperate need of a rate cut to boost growth, the BoE must sit tight because of higher inflation caused by record-high oil prices and soaring food costs, according to economists.

"An interest rate cut is desperately needed to support the rapidly deteriorating economy," said Capital Economics analyst Vicky Redwood.

"But inflationary pressures continue to tie the Monetary Policy Committee's hands."

British inflation hit a 16-year high of 3.3 percent in May, according to official data.

Meanwhile the economy experienced growth of only 0.3 percent during the first three months of 2008, the lowest quarterly expansion for three years amid the global credit crunch and a slowing property market.

In addition, weak manufacturing and services sector data published this week pointed towards a potential recession for Britain, analysts said.

Last Thursday the European Central Bank raised eurozone lending rates by a quarter-point to a seven-year high of 4.25 percent in a move aimed at fighting record inflation.

"Raising (British) rates at this stage of the economic cycle, when the credit crisis remains in full swing and when house prices and housing activity are already tumbling would do little to convince parliamentarians that monetary policy is in good hands," said Investec Securities analyst Philip Shaw.

A further major worry for Britain is a current downturn in its housing market, which according to Redwood of Capital Economics, "is starting to look in awful shape."

Home builder Persimmon said Tuesday that its job cuts would shortly amount to about 1,100 since the start of 2008 as it battles a downturn to the British housing market.

The announcement came a week after Taylor Wimpey, the biggest home builder in Britain, said it was axing 900 jobs because of a weak housing market.

Global Insight economist Howard Archer meanwhile said that British consumers' purchasing power would be squeezed further during the coming months when inflation was expected to rise significantly.

"Furthermore, current rising inflation levels and risks mean that the Bank of England is most unlikely to cut interest rates again any time soon, and could even raise them. This will do little for consumer confidence and spending intentions," he added.

In June, the US Federal Reserve kept its main interest rate at 2.0 percent, saying the likelihood of a sharp economic downturn had diminished while inflation risks had increased in the United States.