The Bank of England’s nine-strong Monetary Policy Committee (MPC) today left interest rates unchanged at 5.25% after reductions in February and December.
The widely-expected decision following the MPC’s two-day meeting comes amid concerns over inflation pressure from oil prices - which reached a new record today - soaring food costs, and rising household utility bills following price hikes by energy firms.
Global Insight’s chief UK economist Howard Archer said: "Current elevated inflation risks meant that it was too soon for the Bank to be comfortable about cutting interest rates again despite serious concerns about the growth outlook."
Industry data this week also signalled surging costs for manufacturing and services firms, heaping pressure on prices.
Although the MPC expects the UK economy to slow sharply during the first half of 2008, it is charged with keeping inflation pegged at 2%. The official measure, the Consumer Prices Index, is currently above target at 2.2%
The committee’s inflation-controlling mandate means it has to be more cautious than policymakers in the US - where rates have already fallen 1.25% this year - although its latest forecasts suggest that rates will fall to 4.75% by the end of 2008.
Most economists predict the MPC will hold off until May before easing rates further, although an April move is not ruled out if there are signs of a more serious slowdown.
Ian McCafferty, the CBI’s chief economic adviser, said holding rates showed the Bank was determined not to compromise on inflation, but added that another cut would be needed "sooner rather than later".
"The MPC is well aware of the intensifying short-term inflationary pressure and needs to balance this against the weakening of the economy we are experiencing," he said.
The EEF manufacturers’ organisation also stressed that the MPC was right to hold rates as the UK economy - while slowing - was in a healthier state than the US, which is verging on the brink of recession.
Chief economist Steve Radley said: "With manufacturing and the rest of the economy continuing to expand and inflationary pressures growing, the Bank was right to hold rates today.
"Unless the evidence shows the economy slowing faster than expected, the Bank should continue to reduce rates gradually."
Even retailers who have been clamouring for rate cuts to ease the squeeze on high street spending said the MPC’s "hands were tied", given the inflation risks.
But British Retail Consortium director general Stephen Robertson added: "As interest rate cuts take several months to take effect, the Bank needs to take action sooner rather than later to ensure that the slowdown doesn’t risk turning into something more serious."
The MPC also weighed up other evidence of a consumer slowdown after market researchers GfK NOP said rising fuel and home energy prices sank consumer confidence levels to a 13-year low last month.
And the CBI’s distributive trades survey showed retail sales growth grinding to a halt in February for the first time in more than a year.
The high street pressure has mounted following five hikes in borrowing costs between August 2006 and July last year, before rates began their downward course again in December.
Higher rates have also cooled the housing market’s runaway growth.
Britain’s biggest mortgage lender Halifax said today that annual house price inflation weakened further to 4.2% - its lowest level since October 2005 - after a 0.3% fall in the price of an average property during February.