July 10 (Bloomberg) -- The Bank of England kept the benchmark interest rate unchanged as policy makers weighed the threat of Britain's first recession in a generation against the risk of accelerating inflation.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5 percent today, dismissing calls from unions and executives to lower it for the fourth time since December. All but one of 49 economists predicted the decision, with the dissenter forecasting a quarter-point increase.

``The British economy is getting into quite a recession,'' Charles Goodhart, who served on the rate-setting panel from 1997 until 2000, said in an interview on Bloomberg Television. ``It's a horrible situation. It's as difficult and as serious a situation as the MPC has ever had to face.''

House prices dropped the most since 1993 in June, Barratt Developments Plc today became the fifth homebuilder this month to announce job cuts, and surveys show the rest of the economy is now contracting. With inflation accelerating above the government's 3 percent upper limit, King has said that Britons should brace themselves for a squeeze in living standards.

The pound was little changed after the decision. The currency traded at $1.9740 and 79.45 pence against the euro, as of 12:10 p.m. in London.

Inflation reached 3.3 percent in May, exceeding the bank's 2 percent target by more than a percentage point for only the second time in a decade, and King said June 26 that it may reach 4 percent this year. At the same time, Lehman Brothers Holdings Inc. says the economy is now in recession.

Housing Slump

House prices fell an annual 6.1 percent in the three months through June, the most in 15 years, mortgage lender HBOS Plc said today. Homebuilders Barratt Developments, Redrow Plc, Bovis Homes Group Plc, Persimmon Plc, and Taylor Wimpey Plc have announced more than 4,000 job cuts since the start of the month.

``The housing market is tumbling and credit is tight,'' Sarah Hewin, an economist at Standard Chartered Group in London, said in an interview on Bloomberg Television. ``The pressures for a rate cut are starting to grow.''

The Bank of England has signaled it's more likely to follow the European Central Bank and raise rates rather than cut them. At least four U.K. policy makers have said they considered increasing borrowing costs last month. Minutes of today's meeting, showing how each member voted, will be published on July 23.

The ECB last week increased its benchmark lending rate to a seven-year high of 4.25 percent. The Federal Reserve's benchmark stands at 2 percent.

Cut Calls

``In the face of ongoing inflation pressures, the Bank of England is caught between a rock and a hard place,'' Matthew Sharratt, an economist at Bank of America Corp. in London, said before the decision. ``Until the outlook becomes clearer, they'll probably leave rates on hold.''

Neil Fitzsimmons, chief executive officer of Redrow, a builder that has lost about 70 percent of its value this year, yesterday called on the U.K. central bank to lower interest rates. The Trades Union Congress, which represents 7 million workers, also wants a cut.

``I know that some families will find it particularly difficult,'' King said on June 19. ``These changes to our spending power and to the housing market are real shifts that, although not easy to accept, we cannot side-step.''

Brown's Popularity

Prime Minister Gordon Brown is losing Britons' confidence as growth slows. Seventy-two percent of respondents said they're not satisfied with his performance since he succeeded Tony Blair last year, according to a poll by Populus Ltd. published July 7. A separate poll last week showed voters are more concerned about inflation now than at any time since 1990.

Consumer confidence fell to the lowest in 18 years last month, GfK NOP Ltd. says. Marks & Spencer Group Plc, the U.K. largest clothing retailer, lost a quarter of its value on July 2 after saying trading conditions won't improve for two years.

Service industries, manufacturing and construction all contracted in June, according to surveys by the Chartered Institute of Purchasing & Supply.

U.K. borrowing costs are rising independently of monetary policy as the credit squeeze deepens. Brown was forced to nationalize Northern Rock in February and Bradford & Bingley Plc, the biggest lender to U.K. landlords, was last week unable to complete a rights offer to boost capital.

Banks are also refusing to pass on the Bank of England's three rate cuts since December, threatening to exacerbate the housing slowdown. The rate on a home loan fixed for two years rose to 6.63 percent in June, the highest since February 2000, the Bank of England said yesterday.

``The economy is certainly slowing, and it wouldn't take much to get a technical recession,'' said James Shugg, an economist at Westpac Banking Corp. in London. ``We think the bank will be cutting rates by September.''

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net.

Last Updated: July 10, 2008 07:24 EDT