March 6 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged as accelerating inflation prevented policy makers from cutting borrowing costs to shore up economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the bank rate at 5.25 percent, as predicted by 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank reduced the benchmark in December and February.

Surveys this week showed factories and service companies raised prices at the fastest pace on record last month, and the central bank predicts inflation may accelerate above 3 percent this year. That makes it harder for policy makers to cut interest rates to protect the economy as house prices fall. Home values slipped 0.3 percent in February, HBOS Plc said today.

``If things go much worse it could happen next month but otherwise I would pencil in May,'' for a rate cut, Charles Goodhart, a former Bank of England policy maker, said in an interview on Bloomberg Television. ``Inflation is getting worse and the economy is probably just a bit stronger than they thought it would be when they made their inflation forecast.''

The pound rose as much as 0.3 percent against the dollar after the decision and climbed above $2 for the first time this year. It traded at $2.0007 as of 12:47 p.m. in London.

The bank will publish minutes of today's decision on March 19, which may show one dissenter, Goodhart said.

G-7 Rates

The Bank of England's benchmark rate is the highest among the Group of Seven industrialized nations. The U.S. Federal Reserve has lowered its key rate 2.25 percentage points since September to 3 percent. The European Central Bank kept its benchmark at 4 percent today, a six-year high, as forecast by all 54 economists in a Bloomberg News survey.

The U.K. central bank signaled on Feb. 13 that the interest rate may not fall to 4.5 percent as investors were betting, and raised its inflation forecast, saying it may exceed 3 percent later this year after oil prices reached a record and wheat prices doubled in a year. Inflation was 2.2 percent in January, the fastest pace in seven months.

An index of prices for service companies from banks to airlines rose to the highest since records began in July 1996, and a measure for manufacturers reached the highest in at least nine years, surveys by the Chartered Institute of Purchasing and Supply showed this week.

Inflation Expectations

U.K. consumers last month predicted that prices will rise 3.1 percent in the next 12 months, close to the highest result since at least 2005, a YouGov Plc survey for Citigroup Inc. showed Feb. 26. Bank of England Deputy Governor Rachel Lomax said the same day she's concerned higher prices will become embedded in the economy.

``The problem is that inflation expectations have risen very sharply,'' Brian Hilliard, director of economic research at Societe Generale in London and a former Bank of England economist, said in a Bloomberg Television interview today. Policy makers ``have a very difficult task ahead of them.''

The threat of inflation has led some business leaders to stop short of calling for further interest-rate cuts soon.

``I'm not crying out for immediate action in the short term,'' Ian Tyler, chief executive officer at Balfour Beatty Plc, Britain's biggest builder, said in an interview yesterday on Bloomberg Television. ``The health of Balfour Beatty depends upon long-term stability rather than short-term reactions.''

Consumer Confidence

Higher food and energy costs are also sapping consumer sentiment. Confidence among shoppers slipped to the lowest level in more than three years in February, Nationwide Building Society said yesterday. Consumer spending rose 0.2 percent in the fourth quarter, the least in more than a year.

Economic growth is slowing after contagion spread from the U.S. subprime mortgage market slump, which has prompted about $181 billion in asset writedowns and credit losses at financial institutions since the start of 2007. The central bank forecasts expansion will cool this year to an annual 1.6 percent rate in the fourth quarter, matching the slowest pace since 1993.

``We may well see further shocks as year-end financial results are published,'' Edward George, who led the U.K. central bank from 1993 to 2003, said at a conference in Edinburgh yesterday. ``I used to be Bank of England Governor, and I'm rather glad that I'm not today.''

The property market is also weakening. House prices fell for the first time in three months in February, HBOS, the nation's biggest mortgage lender, said today. Rival Nationwide said Feb. 29 that prices dropped for a fourth month in the worst streak of declines since 2000.

Credit `Problems'

``We've already seen housing market activity drop sharply,'' said Vicky Redwood, an economist at Capital Economics Ltd. who formerly worked at the Bank of England. ``The longer these problems in the credit market continue, the more likely the downside in the housing market will be more severe.''

Most economists predict three more reductions this year. The rate will reach 4.5 percent, according to the median of 43 forecasts in a Feb. 29 survey.

``The bank is going to move at a measured pace,'' Societe Generale's Hilliard said. ``Cuts are coming quite steadily because the growth situation is weakening.''

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

Last Updated: March 6, 2008 07:53 EST