Interest rates remained unchanged at five per cent last week despite calls from business and property professionals for a cut.

A range of indicators have been pointing to a sharp slow down in economic activity including the latest Purchasing Managers Index (PMI), which signalled a contraction in the service sector for the first time in five years, and several measures of consumer confidence.  In normal circumstances, a slow down on this scale would cap inflation and allow the Bank of England to cut base rates. 

The soaring cost of oil and food, however, is feeding through in to the inflation figures, making it difficult for the Bank to cut rates.  The British Retail Consortium (BRC) - Nielsen Shop Price Index (SPI) for the UK shows shop price inflation climbing in May to 1.8 per cent, up from 1.2 per cent reported in April.  The BRC attributes the increase entirely to the higher cost of food.  Prices in other categories are actually falling.  Inflation currently stands at 3.0 per cent, well above the 2.0 per cent target, and it is almost certain to rise again when the next set of figures are released on 17th June.

Advocates of an early cut, however, point out that higher food and oil prices are set globally and will not be affected by changes in UK interest rates.  A cut in rates, therefore, would not necessarily push inflation higher.  Simon Rubinsohn, RICS chief economist pointed out that there are no signs of an inflationary spiral in the UK: "We acknowledge that there has been a jump in inflation expectations, ....but there is no evidence that the worsening inflation picture is feeding through into wage settlements which is the key issue in terms of assessing the second round effects of the food and fuel price boom.  Modest interest rate cuts alone will not revive the economy but are an important part of the answer".

He also called on the Bank to take another look at its special liquidity scheme and to consider introducing other measures to increase its impact.  He said: "There can be little doubt that lack of access to finance is the major issue impacting on the whole of the property sector ranging from housebuilders through to homebuyers. Failure to act over the coming months will result in a more protracted period of weak growth and a more visible rise in unemployment".