The Bank of England kept 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 the 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.

Bank 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 Bank'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.

TROUBLE FOR BROWN

Attention will now focus on the Bank's new inflation forecasts next week for a clearer idea of the BoE Monetary Policy Committee's latest thinking.

Governor Mervyn King said last week that much of the current doom and gloom is being overdone. The British economy is still expected to grow 1.6 percent this year, according to the IMF, the fastest rate among the Group of Seven rich nations.

But there is little doubt the economy - once the jewel in Prime Minister Gordon Brown's crown - is losing its sparkle, particularly as concern grows that the bursting of the housing market bubble could herald more serious economic trouble.

Consumer confidence has fallen to levels not seen since the recession of the 1990s and voters last week punished the Labour Party by knocking it into third place in local elections.

With his leadership in question, Brown is hoping for an economic rebound in time for a national election that must take place by May, 2010.

Brown, who was chancellor for a decade of prosperity until last year, has said the economy will be his main focus. He has called on mortgage lenders to make borrowing easier for British consumers, who are already in debt to the tune of 1.5 trillion pounds.

The Bank, however, has made clear it does not want to see a return to what it has characterised as the excessive lending of recent years. Its report next week is likely to say that an extended period of slower growth will be needed to ensure inflation does not get out of control.

"That economic slowdown is already starting to emerge, but it is early days so far," said Michael Saunders, economist at Citigroup. "The economy is likely to slow sharply further in coming months. Most of the economic pain still lies ahead."