Sept. 4 (Bloomberg) -- The Bank of England kept the benchmark interest rate unchanged as policy makers judged the fastest inflation in more than a decade outweighed the risk that the economy is sinking into a recession.

The Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5 percent, the central bank said in London today. The decision was predicted by all 61 economists in a Bloomberg News survey.

The pound fell to a record low against the euro this week after Chancellor of the Exchequer Alistair Darling said Britain faces ``arguably the worst'' economic conditions since World War II. The bank has resisted calls for lower interest rates as it tries to tame inflation, which King predicts may accelerate further from the current 4.4 percent, more than double his target.

``Until there is some indication of relief on the inflation front, they are stuck,'' said Neil Mackinnon, chief economist at ECU Group Plc in London and a former U.K. Treasury official. ``But the economy is already in recession and interest rates will have to come down. It's purely a matter of timing.''

The pound rose as much as 0.2 percent against the dollar and the euro after the decision and traded at $1.7807 and 81.26 pence per euro as of 12:50 p.m. in London.

The U.K.'s main rate is the highest in the Group of Seven countries. The U.S. Federal Reserve last month left the benchmark at 2 percent. The European Central Bank raised its rate to 4.25 percent in July and kept it there today, as predicted by all but one of 53 economists in a Bloomberg survey. Sweden's central bank lifted its rate to a 12-year high of 4.75 percent today.

Brown's Woes

The Bank of England's decision leaves Prime Minister Gordon Brown alone for now in his battle to shore up the economy after support for the ruling Labour Party collapsed to the lowest since it took office. The government this week suspended a tax on some home purchases and pledged to accelerate 1 billion pounds ($1.8 billion) of spending to revive the housing market.

Darling said in an interview with the Guardian newspaper published on Aug. 30 that the British economy may face the worst crisis for 60 years. The pound traded below $1.78 on Sept. 2 for the first time since April 2006 and fell against the euro after Darling's comments.

``Looking at it in terms of the challenges facing the authorities, it is as difficult as at any time I can remember,'' former Bank of England Governor Edward George said at an event in London yesterday.

Inflation Forecast

While the bank aims to get inflation to 2 percent, King said on Aug. 13 that the rate will reach about 5 percent later this year and ``a reasonable person'' would expect price increases to stay high ``for a while.'' Scottish & Southern Energy Plc and E.ON AG's British unit said last month they would charge customers more for power and gas to offset rising wholesale costs.

The central bank also predicted the economy will grow about 0.1 percent on a year-on-year basis in the first quarter of 2009, compared with a previous forecast of 1 percent. Gross domestic product was unchanged in the second quarter from the first three months of the year, ending the nation's longest stretch of economic growth in more than a century.

The Trades Union Congress, which represents 7 million workers, had called on the central bank to cut its benchmark rate today, citing the ``great danger'' of a recession.

`Growing Weakness'

``The bank has decided not to cut rates despite the growing weakness of the economy,'' Ian McCafferty, chief economic adviser at the Confederation of British Industry, the nation's biggest business lobby, said in a statement today. ``But as the autumn unfolds the chances of a rate cut will increase.''

The economy has probably been in a recession since ``the middle of the year,'' former Bank of England policy maker Willem Buiter said in an interview with Bloomberg Television yesterday. ``The uncertainty about what is most likely to achieve the inflation target is so great that there is no compelling case for raising or cutting rates.''

U.K. mortgage approvals dropped to the lowest since at least 1999 in July, while surveys by the Chartered Institute of Purchasing and Supply show that services and manufacturing industries contracted for a fourth month in August. House prices dropped 12.7 percent in August from a year earlier, the most since at least 1983, HBOS Plc said today.

``We're moving toward a cut,'' said Alan Clarke, an economist at BNP Paribas in London. ``We forecast one in November but it could come sooner.''

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.

Last Updated: September 4, 2008 07:51 EDT