Interest rates are still on course to be cut next month, the City was betting last night, after the Bank of England rebuffed pleas for a move and pursued its drive to quell inflation.

In a blow to homebuyers and businesses struggling with borrowing costs that are still being driven upwards by the credit squeeze, despite earlier base-rate cuts, the Bank opted to stay its hand yesterday after a quarter-point decrease last month. However, City economists predicted that rapidly worsening economic conditions, with steep falls in house prices and crumbling consumer confidence, mean that the Bank will move next month to order its fourth rate cut since December.

The verdict yesterday from the Monetary Policy Committee (MPC) fulfilled widespread City predictions that base rates would be held at 5percent, as the rate-setting panel walks a tightrope between steep rises in the cost of living and faltering economic prospects.

With inflation being stoked by record oil prices that have sent petrol above £5 a gallon, as well as soaring food prices and higher import bills sparked by a sharp fall in the pound, economists had expected that the Bank would want to make clear its determination to combat inflation by holding rates.

However, most believe that, after this show of resolve, the Bank will be forced to act next month to underpin faltering economic prospects. Before yesterday's disappointing result for borrowers, pressure for a back-to-back rate cut was fuelled by a spate of bleak indications that a downturn in the economy is taking firmer hold, while the mortgage market remains blighted by a drought in home loans.

Fears over the impact of the mortgage log jam were inflamed after Halifax, the biggest mortgage lender, reported that house prices had tumbled by 1.3 per cent last month. Worries over the toll from the housing downturn on the wider economy have also mounted after official figures showed that retail sales fell last month, by 0.4 per cent, and industry reports pointed to a retreat by shoppers from the high street.

Anxieties over a darkening economic outlook were reinforced after a key survey suggested that activity in the crucial services sector had all but ground to a halt last month, and manufacturing output suffered a surprise 0.5 per cent fall in the latest data, for March.

The Bank's latest forecasts will be laid out next week by Mervyn King, its Governor, in a quarterly Inflation Report that will be scrutinised for signals of the MPC's next move. The slide in the pound and the surge in oil prices are tipped to compel the Bank raise its forecast of likely inflation over the next 12 months, and perhaps beyond. Despite that, economists still expect the Bank to be spurred into a rate cut next month.

The MPC came under heavy fire yesterday from some business groups for delaying expected action, although other employers' organisations were more sanguine. The British Chambers of Commerce said that the MPC had “missed a valuable opportunity to underpin business and consumer confidence”, but the CBI said that the Bank had faced a difficult decision and its conclusion was no surprise, while the MPC's verdict was applauded by the Institute of Directors.

The City expects that the MPC was sharply divided over yesterday's decision and the conflicting pressures that the Bank confronts. One MPC member, David Blanchflower, the arch dove, is expected to have called again for a half-point reduction in rates after sounding warnings last month over the danger of recession and a housing crash.

However, the MPC's chief hawks, led by Tim Besley and Andrew Sentance, are tipped to have argued forcefully for base rates to be kept on hold while the Bank fights inflationary dangers.

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