Interest rates held for third month

The Bank held borrowing costs at 5% despite mounting signs of economic gloom, prompting fears over a potential recession. The "no change" call gives little respite to homeowners and borrowers already faced with soaring petrol, food and household energy bills.

But the widely-expected decision comes as the Bank's nine-strong Monetary Policy Committee (MPC) grapples with inflation well above its 2% target at 3.3% - and set to rise further still due to factors such as surging oil prices.

The MPC is facing a delicate balancing act between taming inflation and avoiding a sharp slowdown. This week business leaders at the British Chambers of Commerce warned of a "serious risk" of recession.

The UK has also been hit by a fresh blizzard of poor news from the housing market - with builders axing around 5,000 jobs and a Halifax survey showing a 2% fall in prices during June. This is hitting consumer confidence as the impact of the credit crunch spreads to the wider economy.

Graeme Leach, the Institute of Directors' chief economist, said rate-setters were "caught between a rock and a hard place".

"At this point we believe it is correct to err on the side of caution with regard to inflation and leave rates unchanged. The MPC is acutely aware that if the inflation genie escapes from the bottle, it will be very hard to put it back in again," he said.

But recent downbeat survey data has added to the pressure on policymakers after signalling falling activity in services, manufacturing and construction sectors during June.

Lee Hopley, head of economic policy at the EEF manufacturers' organisation, said the MPC was right to keep inflation on hold for the moment.

But he added: "If further gloom descends and the economic downturn gathers pace, the Bank needs to be ready and willing to cut rates once again."