Bank of England Keeps Interest Rate on Hold

The Bank of England kept the interest rate unchanged at 5 percent on Thursday, caught between the threat of rising inflation and increasing evidence of a weakening economy.

Only 5 out of 65 analysts surveyed by Reuters this week expected the central bank to ease the cost of borrowing for the fourth time since December, despite signals that the UK economy is slowing down in the wake of the credit crisis.

The bank's next move will very likely be a cut, analysts say.

"The door is open to pedestrian pace of interest rate cuts at this stage," Alan Clark, UK economist from BNP Paribas, told "Power Lunch Europe."

"Further down the road I think we’ll get more and more bad economic data and it will step up the pace of easing at some stage. I think we’ll get to 4 percent by the end of the year," Clark added.

The real estate and retail markets have been among the hardest hit sectors in the UK since money markets started to seize up, and further weakness could still be ahead, analysts told CNBC.com.

"The consumer outlook remains grim given falling house prices, negative real wage growth and signs of concerns over job security in consumer confidence reports," ING bank analyst James Knightley wrote in a market note.

Stubborn inflation will not come down that rapidly, Clark said.

"Come September I think inflation is going to be about 3.2 percent, so that triggers a letter in itself," he told CNBC Europe. "I think inflation will be above that 3 percent ceiling for three months so that’s two letters, first time that’s ever happened."

Since the central bank began cutting rates in December 2007, mortgage lenders have failed to pass on the advantages of falling rates to their mortgage customers, with some lenders raising rates, tightening mortgage approval criteria and withdrawing competitive mortgage offers.

© 2008 CNBC.com