Bank holds interest rates at 5 percent

By Matt Falloon

LONDON (Reuters) - The Bank of England held interest rates at 5.0 percent on Thursday as policymakers tussle with slower economic growth and surging inflation, but analysts say rates will have to fall eventually.

Markets showed little reaction to the decision, which had been widely expected, and are still betting that interest rates may yet rise this year because of sustained evidence of simmering inflationary pressures.

Inflation is at its highest -- 3.3 percent -- since the Bank won the power to set rates in 1997, making it hard to cut borrowing costs even though the housing market is weakening sharply and surveys point to a shrinking economy.

"We still think the next move will be down," said Vicky Redwood, an economist at Capital Economics. "It might not be for a few months yet, although if the activity data continues to weaken sharply as it has done in recent weeks then we might not have to wait too long."

The latest gloomy reading on the flagging housing market came on Thursday from mortgage lender Halifax, showing house prices fell at a record annual pace in June. Prices are now nearly 10 percent below the peak hit last August.

Housebuilders say they will have to slash more than 4,000 jobs to help weather the downturn and thousands of estate agents are also expected to find themselves out of work.

Barratt Developments said on Thursday it will cut 1,200, jobs, nearly a fifth of its workforce.

The credit crunch has hit consumers and would-be homebuyers hard as banks react to tougher financial market conditions by tightening up their lending terms. That has driven new home loan approvals down to record lows.