Bank holds interest rates at record low

Policymakers kept the base rate at 0.5 per cent for the 22nd month in a row even though consumer price index (CPI) inflation hit 3.3 per cent in November, driven by the rising cost of food, clothes and oil.

The Bank also maintained money-boosting efforts under the quantitative easing programme at 200bn.

The Bank's policy setters, who are tasked with keeping CPI at two per cent, have admitted that inflation could rise to four per cent in the spring but the rise would be temporary and fall back next year.

The feeble nature of the economic recovery means the Bank would rather brave above-target inflation than risk tipping the economy into a "double-dip recession".

Putting up interest rates might help reduce inflation but it would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts, which would further endanger the recovery.

Consumers' spending power is being squeezed because pay packets are not keeping up with inflation.

There has been a barrage of bad news for cash-strapped consumers in recent weeks as petrol, gas and clothes all rose in price, and last week's VAT rise from 17.5 per cent to 20 per cent pushed up the cost of most goods and services.

Prime Minister David Cameron told the BBC this week that inflation was "concerning" and "well outside what the Bank is meant to deliver".

Monetary policy committee (MPC) member Andrew Sentance has repeatedly called for gradual interest rate rises to stave off the rising threat of inflation.

But the consensus of the committee is that most of the inflationary pressures should fall away in a year's time. There are concerns over the strength of the recovery, which weakened in December