THE Bank of England's decision to cut interest rates in July pushed the headline rate of inflation down last month after mortgage lenders cut the cost of borrowing, official figures showed.

The rate of inflation - measured by the retail price index - dipped after banks and building societies followed the 0.25 per cent cut in interest rates to 3.5 per cent by reducing their interest charges, according to the Office of National Statistics (ONS).

Meanwhile, the usual measure of underlying inflation - which excludes mortgage interest payments - remained unchanged at 2.9 per cent last month.

The news means that inflation has now been above the Government's 2.5 per cent target for 10 months.

On top of July's interest rate cut, house prices rising in August by less than a year ago also led to a large downward contribution to the rate of inflation.

City economists had forecast a rise in the underlying rate of inflation back to its recent peak of three per cent, last seen in April.

Another large downward impact came from leisure services, mainly due to the cost of foreign holidays, which fell this year in contrast with increases last August. Entertainment and other recreational costs saw theatre admission prices fall this year after rising last year.

Upward effects on inflation came from motoring expenditure, where petrol prices rose last month having been unchanged in August last year. The price of cars and other motor vehicles also fell this year by less than a year ago.

Another large upward effect came from clothing and footwear, where prices increased by more this year than last, partly due to less discounting by retailers