Bank of England policymakers have held rates steady at 5 percent for a fifth month running.

Inflation currently stands at more than double the central bank’s 2 percent target but any rise in rates to try to choke that off risks aggravating the overall economic slowdown caused by the credit crunch.

Firmly impaled on the horns of a dilemma, most of the the nine-member Monetary Policy Committee, including Bank Governor Mervyn King, thought no change was the best option, given the risks.

What would you have done?

Britain’s second-quarter GDP growth was precisely zero, reflecting the country’s weakest performance since the recession of the early 1990s.

With growth in the services and manufacturing sectors equalling the dismal figures of 2005 and interest rate futures rising, it’s a double whammy, hitting both our pockets and, some would say, our morale.

At the same time, inflation currently stands at more than twice the central bank’s 2 percent target, hampering the Bank of England’s ability to boost growth by bringing down interest rates.

Most analysts do expect it to cut rates and some predict a move before Christmas. Others say it will have to wait longer.

Do you think the Bank needs to act sooner to prevent a full-blown recession of two quarters of negative growth? Just how bad do you think the economic slowdown will be?

Sterling has extended its losses against the dollar to its lowest level in more than two years , trading just above $1.85. As recently as mid-July one pound would buy two dollars and there were plenty of tales of holidaymakers rushing to the United States to make the most of it.

It’s not hard to see why sterling is under pressure, even though inflation is currently well above target and the highest in years: rising unemployment, falling house prices, large trade and budget deficits, and slowing economic growth.

In a gloomy assessment of the economy this week Bank of England Governor Mervyn King said economic growth would be flat for the next year or so and that inflation would rise to 5 percent or above before falling. Economists had thought accelerating inflation would prevent the Bank from cutting rates, but its suggestion that inflation will begin to ease raised expectations of interest rate cuts. Lower interest rates mean investors get lower returns on sterling deposits, which makes the pound less attractive.

Meanwhile, the dollar has been strengthening amid evidence that the slowing economy is a global trend, rather than one limited to the U.S., meaning investors are bailing out of the pound and the euro. The dollar has also gained on the back of falling commodity prices and concern over the eurozone economy.

Just how far the pound will go is anyone’s guess. Citi’s Michael Saunders even predicts there could be a return to the $1.55 level that sterling averaged between 1993 and 2002. “It would not be a surprise to see a return to those levels in the next 12-18 months,” he says in a note to investors.

There are two sides to the falling sterling coin though.

The pound’s fall will hurt holidaymakers who have benefitted from a strong pound when traveling overseas- and make it more expensive for people to buy second homes abroad.

“The U.S. is still cheap, it’s still a good holiday, but it’s a lot more expensive,” says HSBC analyst David Bloom.

But it provides much needed relief for British businesses, including exporters and the tourism industry, whose products and services will become more affordable to customers around the world. With domestic demand weak, a revival of exports could help the economy and limit job losses.

How will a weaker pound affect you? Are you likely to holiday elsewhere now that sterling doesn’t buy as much as it used to in countries that use the dollar?

Battling with the twin evils of soaring inflation and weaker growth, the Bank of England has kept interest rates at 5 percent for the fourth month running.

With the risk of Britain possibly facing its first recession since the early 1990s, the MPC has clearly opted for caution.

But aren’t the prices of oil and other commodities starting to fall? Isn’t the greater risk towards sluggish growth?

Do you think the Bank is being too cautious and should have gone for a cut?

Exactly one year since the credit crunch started retail sales have shown their biggest fall on record in Britain, news that is likely to spur recession talk among consumers, who are already feeling the pinch from rising fuel and food costs.

For sure, the 3.9 percent drop in June was much worse than expected - economists had forecast a 2.5 percent decline - but shop prices are still higher than a year ago and the retail sales data series is notoriously volatile.

That might be enough to maintain interest rates on hold for now. The hawks among the Bank of England policymakers will find reason to remain cautious, no matter whether commentators are fretting that a combination of rising commodity prices, slowing house prices and falling consumer spending may push Britain into recession later this year or in 2009.

Recent minutes from the monthly meeting showed policymakers remain divided over the future path of interest rates as their opinions were split over whether the main threat to the economy comes from the slowdown in spending or from the spectre of rising inflation.

“Overall it underlines the picture of slowing growth and rising price pressures,” HBOS economist Mark Miller said. Vicky Redwood, from Capital Economics, predicted: “We think that spending growth will weaken considerably further, as house prices keep falling and inflation and unemployment rise further.”

More insight will be gleaned from Friday’s second-quarter estimate of economic growth, followed by the Bank of England’s survey of consumer credit and mortgage approvals for June on Tuesday.

Borrowers might be under the cosh, but savers have never had it so good. Historically, when the Bank of England (BoE) base rate changes, mortgage and savings rates follow suit. But amidst the current credit crunch, those with spare cash and prepared to move their money around can take advantage of banks’ and building societies’ eagerness to attract retail funds.

The last time the base rate stood at its current level of 5 percent was 17 months ago — in November 2006. And there are huge differences between then and now in fixed savings rates. The top six-month fixed rate bond is now paying 1.59 percent more interest on a 10,000 pound investment, at 6.86 percent. Kaupthing Edge and Icesave top the best buy tables with that rate, Heritable Bank is close behind with its new offering of 6.80 per cent as of this weekend, and Alliance & Leicester this week issued a fixed rate bond with a competitive 6.83 percent. “With many people thinking  that the base rate is likely to fall further this year some of the fixed rate products available now look outstanding value,” says David Black, principal consultant for banking at financial research company Defaqto.

There is no saying, however, how long the good times will roll for savers, and those looking to take advantage of attractive rates should move quickly. Remember, too, that the maximum protection afforded under the Financial Services Compensation Scheme is 35,000 pounds per financial institution; those with more than that in cash reserves should split their pot between different providers.

In contrast, the credit crunch is continuing to hit borrowers and investors: overall, even those with substantial savings might wind up no better, or worse, off. The FTSE 100 index has dropped 9.32 percent over the past six months, according to stocks and shares Web site ADVFN.com. Its data highlights the extent of the volatility that has been hampering markets. Having opened the year at 6450.9, Britain’s blue chip index dropped to its lowest level of 5338.7 points on January 22 — a long way from its six month intraday peak of 6751.7 achieved on October 15. This equates to a 1413-point move — a 21 percent drop from the index’s high to its low. “There are no two ways about it; we are in a bear market,” says chief executive Clem Chambers. “In markets such as these where the underlying trend is down, strong rallies are commonplace, but the day-to-day weakness overcomes moments of strength overall. Breaking back up through psychological barriers such as 6000, unfortunately, does not mean the good times are back. This is bad news for investors but can be profitable for traders.”

And, in mortgage markets the London Inter Bank Offered Rate (Libor) — the most famous barometer for short-term interest rates in the world — continues to loiter stubbornly high in relation to the base rate. Libor, the rate at which lenders borrow money, determines mortgage pricing for consumers, and is now the “hoodie of the finance world” — symbolic of a fallen system, where banks lack the confidence to step out of their houses to trade with each other — according to independent mortgage broker Charcol.

The BoE’s discussions on the mortgage market will not necessarily improve the situation, according to Andrew Townsley, chief executive of Sheffield Mutual and president of the Association of Friendly Societies. “Even if market conditions improve, mortgage lenders are likely to continue to impose relatively high lending rates on mortgage products and the situation won’t necessarily improve for borrowers,” he warns. “Banks will be tempted to improve profit margins, and although lending rates may come back a little we won’t see them revert to the attractive levels borrowers have experienced over the last few years, for some time yet.”

Savings rates could soon take a turn for the worse, too: ”We can expect to see a drop in attractive saving rates as the situation eases, meaning the consumer remains yet again at a disadvantage,” says Townsley.

Not time to crack open the bubbly yet, then.

Thursday’s cut in interest rates should come as some relief to hard-pressed borrowers, under the cosh from the credit squeeze which has seen lenders raise their rates, cut maximum loan-to-values and tighten lending criteria. Those on tracker rates – that mirror movements in the base rate – will, of course, see a reduction in the amount of interest they pay. Others, though, are at the mercy of their lenders.

A string of high-street names said they’d reduce their standard variable rates following the quarter-point Bank of England (BoE) base rate reduction to 5 percent. That, however, will only partially offset hikes imposed by many of these very lenders in recent times and many commentators argue that the Monetary Policy Committee has failed to go far enough to ease the pain in the mortgage market — and should have acted faster by cutting rates by 0.5 percent.

Nationwide Building Society is raising rates by as much as 0.32 percent on some products and several others — Alliance & Leicester, Chelsea Building Society, Standard Life Bank and Leeds Building Society included — have hiked rates on some of their mortgage products by up to 0.26 percent.

The real problem lies in the gap between the base rate and Libor, the interbank lending rate, which dictates the deals offered to mortgage borrowers: it has ballooned in recent months, despite two cuts in the BoE base — and only a substantial cut in interest rates would have any real impact on narrowing the gap, according to online mortgage company mform.co.uk.

“The crucial factor is the gap between Libor and the base rate; they are massively out of sync and that is dictating terms in the mortgage market,” says chief executive Eamonn Rice. “The 0.25 percent cut will have no effect. The Bank of England has failed to grasp the opportunity to help homeowners and potential borrowers.”

The Bank of England has responded to the credit crunch by cutting interest rates by one quarter of a point to five percent, the third cut in five months.

It acknowledges the risks of stoking inflation but says the availability of credit seems to be worsening.

With the difficulties of finding loans so painfully apparent and the housing market in dire straits, do you think it is being too cautious? Should it have cut more?