The Bank of England trimmed interest rates today to help shore up the economy but policymakers remain worried about inflation, dampening hopes of rapid fire rate cuts.
The BoE lowered its key rate by a quarter percentage point to 5.25 per cent, following a similar cut in December.
The central bank faces its toughest monetary policy challenge since becoming independent from the government in 1997 as the economy slows while inflation remains a threat.
Pressure has increased on the BoE's Monetary Policy Committee to slash borrowing costs like the US Federal Reserve. But the UK central bank said it wanted to see growth cool this year as soaring energy and food bills are driving inflation higher.
"The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target," the BoE said.
With policymakers on inflation high alert, the Labour government may not be able to count on any help from the BoE in its fight to boost growth and repair its tarnished reputation for economic stewardship ahead of an election due by May 2010.
However, Britain's top five banks were quick to respond to the rate cut with a similar easing in their own lending rates, potentially making life easier for squeezed homeowners and providing a prop to the cooling housing market.
The European Central Bank has also stuck to a tough line in its response to the global credit crunch. On Thursday it kept its key interest rate at 4 per cent, brushing off calls to join attempts to avert a sharp worldwide economic slowdown.
However, markets still expect Britain's Monetary Policy Committee to deliver more rate cuts this year, albeit at a measured pace, especially given fears of a recession in the United States.
The central bank's quarterly inflation forecasts next week will reveal just how severe the threat from inflation - and, on the other hand, slowing growth - is regarded among policymakers and what may be expected in response.