LONDON (AP) — The tricky job facing the Bank of England as it tries to steer Britain through the credit crunch was highlighted yesterday with the release of data showing both the largest monthly fall in house prices in 17 years and the fastest rise in retail prices in 16 years.

The housing downturn reflected slowing economic activity, making a good case for the central bank to cut official interest rates next week. But rising retail prices signal that inflation continues apace, a fact that will likely stay the bank's hand.

The Nationwide Building Society reported yesterday that house prices fell by 2.5 percent in May, leaving prices now 4.4 percent lower on average than a year ago.

That was the biggest year-on-year drop since December 1992 when prices had fallen 6.3 percent in 12 months and the biggest since Nationwide began tracking house prices in 1991.

It stressed that house prices are still five percent higher than two years ago, and said the current downturn is likely to be less painful the dramatic price declines of the 1990s. However, Nationwide's chief economist Fionnuala Earley acknowledged a "gathering momentum of negative sentiment about the housing market".

Meanwhile, the Confederation of British Industry, Britain's leading employers' organisation, said that 56 percent of retailers reported higher selling prices in the past three months. Some 52 percent said they planned to raise their prices over the next three months.

The CBI cited increasing energy, food and raw material costs.

The two sets of data sum up the quandary faced by the Bank of England's rate-setting monetary policy committee, which must weigh soaring inflation in the midst of a slowing economy.

"The MPC will be disappointed to see a further rise in the quarterly balance of expected selling prices, suggesting that retailers intend to pass on at least some of their rises in costs," said Vicky Redwood, UK economist at Capital Economics.

"There's nothing in this survey ... to suggest that the MPC's uncomfortable situation of balancing weakening activity and rising price pressures is easing."

The bank has cut rates twice this year, by a quarter of a percentage point each time, as the credit crisis deepens its hold on the economy. The British economy expanded at its slowest pace for three years in the first quarter of 2008, with gross domestic product growth at just 0.4 percent.

Many economists had previously expected the bank to cut rates from the current five percent at its June meeting in a week, but an acceleration in inflation to three percent in April from 2.5 percent the previous month — well above the bank's two percent target — and surging oil prices have led most to rethink their forecasts.

"With low and stable inflation, the generally agreed priority for all developed economies, a no-change decision appears to be the minimum signal which the UK central bank can send to investors in order to underline its inflation-fighting credentials," said Hargreaves Lansdown equity analyst Keith Bowman.

Economists are now divided on the timing of another cut, with some predicting the bank will trim rates in August and others suggesting that may be too early.

"While we still believe that extended below-trend growth is likely to lead to interest rates eventually falling as low as 4 percent, it will be a gradual process and unlikely to happen until well into 2009," said Global Insight chief UK economist Howard Archer.