By Sumeet Desai

LONDON (Reuters) - The Bank of England kept British interest rates at 5.0 percent on Thursday but analysts say a slowing economy will force it to cut borrowing costs next month, even though inflation is heading higher.

House prices are falling, consumer confidence is crumbling and even growth in Britain's mighty service sector has almost ground to a halt as a global credit crunch means the cheap loans and easy lending of the last few years are over.

The central bank has already cut borrowing costs three times from a peak of 5.75 percent since late 2007 to protect consumers and businesses. Many economists say rates could fall as similar number of times over the next year.

"The financial crisis is clearly sharply applying the brakes on the economy," said Peter Spencer, chief economic adviser at Ernst and Young. "Its most obvious effect is to be seen in the housing market, where the mortgage famine is rapidly undermining both prices and transactions."

But inflation is running high, complicating life for policymakers in Britain as well as in many other parts of the world, as supermarkets raise ordinary food prices and the cost of petrol hits record highs.

BoE policymaker David Blanchflower has said worrying about inflation now is like fiddling when Rome burns. He warned that the economy could soon follow the United States into recession and that house prices could tumble 30 percent.

But other policymakers are more sanguine, especially as the BoE's mandate is to keep inflation at two percent. It is currently well above that and expected to go higher still.

The European Central Bank also left interest rates unchanged on Thursday at 4.0 percent as it grapples with high inflation and a slowing euro zone economy.