Bank holds interest rates at 5.5%

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Policymakers on the Bank's Monetary Policy Committee (MPC) refused to waver despite concerns over a consumer spending slump following poor Christmas trading from retail big guns such as Marks & Spencer, Next and Currys owner DSG International.

Economists said it was likely to have been a tight vote after the two-day meeting, adding that interest rates would now fall in February. The British Retail Consortium (BRC) said the decision made the need for a cut next month "all the more pressing".

BRC director general Kevin Hawkins said: "The worst Christmas sales growth for three years shows consumers and retailers are still feeling the effects of five previous rate rises as other bills continue to shoot up. The longer the Bank delays cutting rates again, the greater the risk of the economy heading in the wrong direction."

Alongside the signals of a high street slowdown, the Halifax building society's latest figures this week showed the first quarterly fall in house prices since 2001, with downbeat recent survey data from both the manufacturing and services sector.

But the MPC is charged with keeping a lid on inflation and its official benchmark, the Consumer Prices Index, is currently running above target at 2.1%.

The committee is likely to have been swayed by inflationary risks from oil prices close to 100 US dollars a barrel, food costs, and the prospect of rising household energy bills following Npower's price hikes last week.

Tighter conditions in financial markets following the credit crunch have also eased since five central banks across the world pumped in billions of pounds in emergency funding in December.

The CBI's economic adviser Ian McCafferty said: "What probably tipped the balance in today's decision was the much greater calm in the money markets. This has allowed the Bank to take its time in assessing where the economy is going for next month's meeting."

But the EEF manufacturers' organisation said the Bank had missed an opportunity to "stamp its authority on the economy" with a second successive rate cut.