Edward Menashy, chief economist at Charles Stanley, believes the decision to hold the May benchmark rate sends out a positive message. "It indicates that MPC does not judge the UK economy to be in a parlous condition that requires the first back-to-back reduction in interest rates since 2003," he said.

"Rumours were swirling around the market late on Wednesday evening that, as a result of a plethora of negative sentiment indicators suggesting that the UK economy had fallen off a cliff, the MPC would be forced to cut base rates by 25 basis points. However the committee did not budge, maintaining its belief that UK can emerge out of the credit crisis morass without sustaining a recession," Menashy added.

"There will be further, if un-dramatic, cuts in interest rates aided by more depreciation in sterling," he concluded.

James Knightley of ING Financial market said - excluding comments made by David Blanchflower - given the hawkish tone of speeches by MPC members over the past few weeks, a successive BOE rate cut had a very limited chance of materializing.

"Nonetheless, we think that the BOE will ease monetary policy further over the next twelve months. The consumer outlook remains grim given falling house prices, negative real wage growth and signs of concerns over job security in consumer confidence reports," he added.

Looking ahead, Knightley also feels weaker global growth will result in slower commodity price appreciation, and could also prompt price falls for some commodities. "This should help dampen inflation pressures and since the MPC targets CPI on a two year horizon, it may offer its members enough room to justify up to 100 basis points of rate cuts between now and year-end," he concluded.

Howard Archer, chief UK economist at Global Insight, thinks most MPC members probably favour maintaining the current policy of gradual but steady trimming of interest rates.

"The MPC is particularly worried that current elevated inflation levels and likely further rises over the next few months - primarily resulting from higher utility and food prices, as well as the weaker pound - could lift inflation expectations markedly for an extended period," he said.

Looking ahead, Archer thinks the MPC will trim interest rates from 5.00% to 4.75% in June, thereby maintaining the trend of cutting by 25 basis points every two months.

"Further out, we anticipate that interest rates will fall to 4.00% by the end of 2008 and to 3.75% in the first quarter of 2009 as extended below-trend growth increasingly undermines companies' pricing power and limits wage growth," he said.

Simon Rubinsohn, chief economist at RICS, described the decision as a disappointing one. "While we appreciate the risks associated with the recent pick-up in inflation and acknowledge the danger of it moving into 'letter writing' territory during the second half of the year, the tone of recent data and surveys suggest that the threat of a sharp slowdown in economic activity is the more pressing issue for the authorities," he said.

Rubinsohn thinks there is a high probability of growth falling short of BOE expectations as set back in February, and that it would create the spare capacity to lower inflation in the medium term.

"We believe BOE needs to take further pre-emptive action over the coming months starting with the June meeting in an effort to decisively counter the impact of the credit crunch," he said.

UK business lobby groups, though unsurprised, gave a mixed response to the rate announcement. Commenting on the decision, Ian McCafferty, chief economic adviser to the Confederation of British Industry, said, "The latest data shows the economy is slowing, albeit only gradually, and at the same time inflationary pressures continue to mount. So, the BOE faced a difficult decision, but it is no surprise that May rates were kept on hold."

McCafferty feels that while the UK housing market and linked activities are very weak, activity elsewhere is slowing, but is well short of recession.

David Kern, economic adviser to the British Chambers of Commerce, described the decision as unsurprising and disappointing. "After cutting rates in April, most analysts have predicted correctly that the MPC would be reluctant to cut rates again in May. However, we believe this decision was a mistake given the serious threats to economic growth. The MPC has missed a valuable opportunity to underpin business and consumer confidence and to limit the potential damage to the economy," Kern said.

EEF, the body representing UK manufacturers, said the decision to hold rates was akin to "delaying the inevitable."

EEF's chief economist Steve Radley said, "The UK economy has been through a series of shocks since the credit crisis hit last summer and the BOE has been right so far in responding with a measured approach on rates. However, despite concerns on inflation, further cuts to interest rates are needed to prevent the economy from drifting towards recession."

The minutes of the meeting will be published at 5.30 a.m. EDT on May 21. Ahead of the minutes, MPC's latest inflation and output projections will appear in the May Inflation Report due to be published on May 14.

By Gaurav Sharma, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it