The Bank of England is expected to keep interest rates on hold this week despite growing fears that the UK could be heading for a recession.

The Monetary Policy Committee will face one of its toughest calls when it begins its two-day meeting on Wednesday following a recent run of bleak economic news.

But with inflation currently running above 3% and likely to continue rising in the coming months, the MPC is not expected to cut rates in order to boost the economy.

Gloomy economic data has piled up since the committee last met, with the Chartered Institute of Purchasing and Supply last week saying the UK's dominant service sector shrank at its quickest rate for nearly seven years during June, while consumer confidence has fallen to its lowest level for 18 years.

At the same time GDP growth has been revised down to 0.3% from 0.4% for the first quarter of the year and manufacturing activity has slumped to its lowest level since the aftermath of the September 11 terrorist attacks.

Nationwide said house prices fell for the eighth month in a row during June to stand 6.3% below their level 12 months ago - the fastest rate of decline since the 1990s house price crash, and construction activity slowed at its fastest rate for at least 11 years.

But set against this bad data is rising inflation, with Consumer Prices Inflation reaching 3.2% in May, and it is expected to continue climbing to 4% over the coming months.

Bank of England Governor Mervyn King recently expressed his determination to stamp out rising prices, but he also warned of the need to avoid a slow down that was so pronounced it pulled inflation below its 2% target.

Overall, the MPC is unlikely to follow the lead of the European Central Bank and increase rates, and is instead widely expected to keep rates unchanged at 5% for the third month in a row.

But it is thought the vote could be split three ways, with David Blanchflower likely to call for a cut for the ninth month in a row, while others are likely to vote for a hike in the cost of borrowing in a bid to curb inflation after it emerged the case for a rise had been discussed at June's meeting.

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