The Bank of England yesterday held UK base rates at 5% � a move which bore out the view of business leaders and economists that it had no other real option amid sharply-slowing growth and rampant inflation.

The Bank of England yesterday held UK base rates at 5% - a move which bore out the view of business leaders and economists that it had no other real option amid sharply-slowing growth and rampant inflation.

"I can't think of a better example of what it means to be stuck between a rock and a hard place," said Stuart Porteous, head of group economics at Royal Bank of Scotland.

Speaking after the Bank's Monetary Policy Committee announced its no-change decision at the end of its latest two-day monthly meeting at noon yesterday, Porteous added: "Recent news on the growth front has been disappointing, sometimes dishearteningly so, while inflation has shown no signs of subsiding. Until a stronger case can be made for a decisive move in either direction, the MPC will do what it has done today - keep rates on hold."

Liz Cameron, chief executive of Scottish Chambers of Commerce, said: "This decision to keep interest rates on hold is not unexpected and demonstrates the increasingly fine line which the Bank of England is having to tread in order to balance its duty to control inflation with the need to promote economic growth."

She added: "Scottish businesses are feeling a number of pressures from rising energy costs, rising transportation costs and the high cost of raw materials. Business confidence has taken a hit this year and it is important that we keep the Scottish economy on track."

Roger Bootle, the economist who founded London-based consultancy Capital Economics and is an adviser to accountancy firm Deloitte, meanwhile highlighted his growing belief that the MPC cannot in any case do anything now to ward off a UK recession.

Bootle, among the most downbeat of forecasters at the moment, said: "It is too late for the Monetary Policy Committee to prevent the economy from slipping into a recession. And lingering inflation fears mean that it probably won't be until late this year that the committee is able to cut interest rates to limit the depth and duration of the downturn.

"The economic outlook is more grim now than at any point since the early 1990s, when the level of GDP gross domestic product fell by 2.5% and unemployment rose by 1.4 million.

"The extent of the weakness of the news on activity in recent weeks has been breathtaking. While a recession, as defined by two consecutive quarters of falling output, looked like the worst-case scenario a few weeks ago, it now seems like the most likely, and appears perilously close to boot."

Bootle added that "the news on inflation means that the MPC is almost powerless to respond to the weakening in activity".

Benchmark annual UK consumer prices index inflation rose to 3.3% in May - well above the 2% target set for the MPC by the Treasury.

Bank of England Governor Mervyn King has conceded that it is likely to rise to more than 4% later this year.

Bootle claimed yesterday: "If rumours that utility suppliers intend to raise their prices by 40% prove true, it could peak at over 5%."

He added: "Admittedly, there has been little evidence that the rises in food and energy costs are feeding through into the prices of other products or wage growth. But, with the UK's low-inflation climate more at risk now than at any point in the last decade, the MPC will not want to take any risks. It will probably not be able to cut interest rates until late this year at the earliest.

"But this will only exacerbate the economic downturn that appears to be gathering pace by the day. I still think that interest rates will have to fall very sharply, perhaps to 3.5% next year. But this will come too late to save the economy. Even if the UK were somehow to avoid a recession, it is clear that it is set for a long period of very weak activity."

The MPC's interest-rate announcement was preceded yesterday morning by further bleak news on the UK housing market from Halifax, the country's biggest mortgage lender.

HBOS-owned Halifax said the average UK house price dropped by 2%, on a seasonally-adjusted basis, during June alone to leave it 8.7% lower than in the same month last year.

This year-on-year fall of 8.7% in June was bigger than any such movement during the early-1990s housing market crash, although it does follow years of very strong increases in UK residential property prices. Halifax noted yesterday that the average UK house price had returned to the level it was at in August 2006.

Taking the second quarter as a whole, the average UK house price was down 6.1% on the same three months of last year.

Howard Archer, chief UK economist at consultancy Global Insight, yesterday revised yet again his forecast of the fall in the average UK house price this year, from 12% to 15%. He expects a further 12% fall in 2009.

The MPC cut UK base rates from 5.75% to 5% between December and April. In late-April, there had been high hopes of a further quarter-point cut in rates in May or June but these were dashed by a raft of dire inflation numbers.

David Lonsdale, assistant director of the Confederation of British Industry in Scotland, said yesterday's no-change decision by the MPC "isn't surprising".

He added: "The MPC remains acutely aware of the short-term inflationary pressures, and of the need to balance this against the current slowdown in the economy. Delivering inflation stability over the medium term remains the right approach. Previous data suggesting a worrying increase in the public's expectations of inflation have yet to feed through into a more ingrained effect on wage bargaining."