Any hopes that the Bank of England would step in and try and help us all by cutting interest rates have been dashed today.

This is because the Bank announced rates would stay at 5% for at least another month.

It is the fifth month in a row that the Bank's Monetary Policy Committee (MPC) has held rates at 5%, after cutting rates by 0.75% in the space of five months.

The decision is not unexpected given that the twin threat of a slowdown in the UK economy and rising inflation has left the Central Bank with little room to manoeuvre.

The MPC is in a difficult position right now. On the one hand it has to try and look after the UK's economic growth: this something that has been plummeting and many now expect the UK to fall into recession, potentially before the end of the year. 

To increase growth, rates need to be cut; making borrowing cheaper and saving less worthwhile.

This means we have more money to spend, as costs including mortgage rates fall, and less reason to save as we are not given as good a return on our money. More spending translates into better trading at shops and other outlets meaning business is boosted.

However, more spending also tends to push up inflation. As more of us spend, there is less reason for shops to keep prices low; and so the price of goods rise.

David Kuo, Head of Personal Finance at money website Fool.co.uk, says:

“The Bank of England has sent a clear signal that it intends to bear down on the fastest rise in the rate of inflation for over a decade.

“Whilst the Central Bank may want to respond to declining house prices, stuttering economic growth and, more recently, weakness in the pound, it cannot afford to take its eye off the rising cost of living.

“However, the decision by the Bank of England to stand firm in its fight against inflation has opened up prospects of more tax giveaways by the Government to soften the impact of the slowing economy. 

“But tax cuts and interest rate reductions are strange bedfellows when inflation is rising. So, homeowners should not bank on a rate cut in the near term. Instead, anyone on tracker mortgages should try to increase their monthly repayments now to avert a bigger problem later on.

 “Tax giveaways can be inflationary, which would heap more pressure on the Bank of England to not only stand firm on interest rates, but to even consider hiking them.”

© www.fool.co.uk 2008