Interest rates remain at record low despite inflation fears

Policymakers kept the base rate at 0.5% for the 22nd month in a row even though consumer price index (CPI) inflation hit 3.3% 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 200 billion.

The Bank's policy setters, who are tasked with keeping CPI at 2%, have admitted that inflation could rise to 4% 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% to 20% 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.

And there are concerns over the strength of the recovery, which weakened in December, hindered by the Arctic weather.

Markit/CIPS data showed that the construction sector fell further into decline in the month, while the powerhouse services sector contracted marginally for the first time in 20 months, leaving only the manufacturing sector in growth.

GDP figures for the second and third quarters were also revised down from 1.2% to 1.1% and from 0.8% to 0.7% respectively, adding to fears over the strength of the recovery.

Markit economists say the recovery had "near-stagnated" and expect the UK's GDP growth in the fourth quarter of 2010 to be just 0.4%.

British Retail Consortium figures released earlier this week showed sales in December were at their worst for eight months as the snowy weather and money worries caused shoppers to cut back on buying presents.

Economists disagree on when interest rates, which have been at their current level since March 2009, will rise.

Last month, the CBI warned that rates would start to rise by the spring and the base rate would hit 2.75% by the final quarter of 2012.

Economists are slowly bringing their predictions of when interest rates will rise forward as inflation grows.