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The Bank of England held interest rates at 5.25 per cent this month on concerns over inflation.

Yesterday's RBS/NTC Eurozone Purchasing Managers Index (PMI) report, which measures service sector growth, showed an overall European index reading of 52.3, up from 50.6 in January, with particular acceleration in service sector growth in Britain.

Research from industry body British Retail Consortium, also released yesterday, shows high retail inflation over the month, particularly in food.

The combination of better-than-expected growth in the service sector and rising inflation may have prevented a cut this month from the monetary policy committee (MPC), but economists are predicting further cuts over the year.

In a statement, Halifax said: "We expect the Bank of England to follow up the two interest rates cuts since December with further reductions during the remainder of the year.

"The MPC is, however, likely to adopt a cautious approach due to concerns over inflationary pressures and an absence of signs that the economy is slowing sharply."

Julian Jessop at Capital Economics added: "The sharp slowdown in household spending growth and the outright fall in investment suggest that higher interest rates and the credit crunch are taking their toll on spending.

"The MPC is likely to continue to cut interest rates only gradually, with rates likely to remain on hold until May," he said.

He concluded interest rates would eventually fall to four per cent in 2009.