THE Bank of England held interest rates at 5 percent for the second month running yesterday despite evidence almost daily showing a sharply braking economy and signs the housing market could be in for a hard landing.

The reason: inflation is running a full percentage point above the central bank's target and is expected to go higher still. Money markets had priced in almost no chance of a reduction at this month's Monetary Policy Committee meeting.

Credit crunch

But analysts say the BoE will soon have to cut rates again ?? borrowing costs have come down three times since December ?? to bolster an economy battered by a global credit crunch and soaring food and energy prices.

"The economy is clearly slowing and the housing market has deteriorated sharply, so the MPC will need to cut rates later this year to head off the risk of a recession," said John Hawksworth, head of macroeconomics at PricewaterhouseCoopers.

Figures out while policy makers were still in conference showed British house prices plunged 2.4 percent last month alone, and 12,000 pounds (US$23,468) had been wiped off the value of the average home over the last year.

Another survey on Wednesday showed Britain's services sector contracted last month for the first time in five years with companies cutting jobs for the first time in more than a decade.

But the problem for policy makers ?? BoE Governor Mervyn King has described conditions as being the most challenging since the MPC started in 1997 ?? is that inflation will not go away as global oil prices hit record levels and food shortages abound.

Policy makers fear reducing interest rates when inflation is so far above the 2-percent target would risk the BoE's credibility and higher price rises becoming entrenched in people's minds.

"The cost of keeping interest rates higher for longer in order to slay the inflation dragon will be a more severe and longer-lasting downturn in activity," said Roger Bootle, economic adviser to Deloitte.

"The odds of an outright recession are shortening by the day and may now be as much as one in two," according to Roger.