Figures out on Tuesday showed inflation hit 3.3 percent in May, the highest since the Labour government came to power in 1997, forcing Governor Mervyn King to write to the government explaining why.

In his letter King calmed market nerves over imminent rate hikes, saying policymakers had to balance short-term price pressures against the risk of a sharply slowing economy pulling inflation below the 2 percent target in two years.

Blanchflower, the lone voice in favour of a rate cut, said there was a growing risk of the economy turning down very sharply, though recession was not his central forecast.

FACTORY ORDERS IMPROVE

News on the economy has been bleak in recent weeks and the Bank policymakers noted that housing market conditions had "deteriorated sharply" and the effects of the global credit crunch were still working their way through the economy.

Chancellor Alistair Darling will tell the annual Mansion House dinner of City of London financiers later on Wednesday that the country’s economic policy framework was facing its biggest test in years, said Treasury officials.

The Confederation of British Industry’s monthly survey of industrial trends out on Wednesday, however, showed factory order books improving. Price pressures were also rife, though.

"Manufacturing demand is holding up reasonably well," said Ian McCafferty, the lobby group’s chief economic adviser. "Manufacturers, especially those exposed to the global economy, have been less affected by the slowdown in domestic spending than others."

Retailers are certainly complaining. Woolworths Group, which has more than 800 stores up and down the country selling everything from confectionary to cameras, reported falling sales on Wednesday and said it was "cautious about the consumer economy".

Supermarket chain Sainsbury’s results also disappointed on Wednesday with its shares falling as much as 3 percent.

"Sainsbury’s update showed how competitive the environment is out there, with consumers having less money in their pockets due to higher mortgage payments, higher taxes and higher prices at the pump," said Barclays strategist Henk Potts.