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The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 5.0%.
The Bank is caught between a rock and a hard place when it comes to setting rates at the moment. On the one hand, cutting interest rates might help the housing market, mortgage holders and boost spending on the high street.

But on the other hand, inflation is soaring above the government’s target - potentially hurting the economy more tha the credit crunch - and the pound is falling against the euro. Raising interest rates might help both of these things.

Put in this position, the Bank’s interest rate setting Monetary Policy Committee (MPC) voted to keep rates on ice for at least another month.

The move surprised few analysts, with 69 of the 72 economists polled by the Reuters news agency successfully predicting that the MPC would keep rates at 5%.

It’s the Bank’s job to keep inflation as close to its 2% annual target as it can, while also looking after the general welfare of the economy.

This is a job that is becoming increasingly difficult at the moment. Food bills as well as the cost of petrol, gas and electricity have been soaring in the last year. On top of this, the pound is running near record lows against the euro meaning the cost of buying goods that have come in from Europe will rise. This is pushing inflation well above the bank’s target rate.

Many are still calling for a cut in the underlying cost of borrowing - with MPC member David Blanchflower voting for a cut in the base rate for eight months in a row.

And many economists agree. “The MPC must be forward-looking. If it is clear that the imminent increase in inflation is temporary, while plummeting growth would produce sharp falls in inflation later in the year and in 2009, the MPC must be prepared to cut rates without undue delay to limit damage to the economy,” said David Kern, economic adviser to the British Chambers of Commerce.

“The priority must be to ensure that an unavoidable moderate slowdown does not degenerate into a needlessly severe downturn.”

However, others see inflation as the bigger threat. Willem Buiter, who was among the founding members of the MPC, thinks rates should rise.

“The Bank hopes that, with the economy slowing down quite sharply, further rate increases will not be necessary to get inflation back on target over a two-year horizon. I am not so sure,” he told the Telegraph.

“A bank rate increase now could have an impact on inflation expectations, precisely because it would be costly. It would push up unemployment and weaken economic activity, but this is a price worth paying. I would vote for a quarter of one per cent increase in bank rate at the next MPC meeting.”

“It currently seems highly unlikely that the Bank of England will be prepared to trim interest rates from 5.00% to 4.75% until August at the very earliest,” said Howard Archer, chief UK economist at the consultancy firm Global Insight.

“Even August may well prove premature for the Bank of England,” he added.