Concerns about an accelerating rate of inflation were outweighed by evidence that the UK economy may be going through a sticky patch, analysts said.

Government figures on Monday showed a drop in manufacturing and industrial output, while consumer demand is slack and house price growth has cooled.

Analysts said that UK interest rates were now more likely to drop than rise.

'Rates have peaked'

With interest rate rises now largely off the agenda, attention will soon turn to when the Bank of England is likely to start cutting interest rates Roger Bootle, Deloitte

Roger Bootle, who helped set interest rates under the last Conservative government and today advises accountancy firm Deloitte, said the decision "all but confirms that interest rates have peaked".

The Bank would have "been concerned that a pre-emptive rate hike to counter the recent pick-up in inflation would prove to be the final nail in the consumer coffin and further undermine confidence in the housing market", Mr Bootle said.

"With interest rate rises now largely off the agenda, attention will soon turn to when the Bank of England is likely to start cutting interest rates," he added.

On Monday, figures from the Office for National Statistics showed that manufacturing production fell 1.6% in March - the biggest drop since June 2002 - while industrial production slid by 1.2%.

Crumbling foundations?

That data comes after mortgage lender Halifax said UK house prices were unchanged in April, adding there had been no movement since January.

Its report showed that annual price inflation had fallen to 7.8% in April - its lowest level since June 2001 - down from 9.7% in March.

UK manufacturers have suffered

The confusing state of the UK housing market was underlined on Monday when the Office of the Deputy Prime Minister said that according to its figures - which lag behind other surveys - the annual rate of price inflation was 12.6% in March.

Analysts said that even though the figures were out of kilter, it was not enough to signal a change in the softening of house prices nationwide.

The uncertainty surrounding the housing market has prompted many consumers to curb their spending, according to the CBI.

The business lobby group's monthly trade survey showed UK retail sales fell at their fastest pace in almost 13 years during April, prompting it to urge the Bank of England to leave rates on hold.

High Street problems

Company statements have made for equally sobering reading, with home improvement firm Kingfisher, general retailer Argos and music seller HMV all reporting falling sales.

Even budget stores are feeling the pinch - discount retailer Matalan reported sales plunged in March and April.

On top of that, economic data from the US and Europe, key trading partners, have shown a decidedly mixed picture.

"Most recent economic figures point to slowing activity, weakening domestic demand, and lower confidence," said David Frost, director general of the British Chambers of Commerce.

"British businesses welcome today's MPC decision to leave interest rates unchanged."