The Bank of England has left interest rates unchanged at 4.5 per cent amid signs of a revival in high street spending and continuing fears over the threat of inflation.

The Bank’s rate-setting Monetary Policy Committee (MPC) has now kept the cost of borrowing unchanged since August's quarter point cut, despite five consecutive quarters of below-trend growth, because of a fear that a year of soaring fuel costs might trigger an inflationary spiral with wages and prices both rising.

Although most analysts predict the Bank will reduce rates at some point in the coming months the move is unlikely to come before data on the all-important January pay round. Analysts are also expecting the Bank to wait until after the completion of its latest detailed analysis of the economy in its February Inflation Report.

Howard Archer, chief UK economist at Global Insight, said: "The MPC are likely to want to see consistent evidence that 2006 pay settlements are limited and have some idea of how well retail sales hold up in January before seriously considering a further reduction in interest rates."

"We believe a quater point cut could yet occur by March, as it becomes clear that growth is still lacklustre and underlying inflationary pressures continue to be muted. However, there is a growing possibility that a rate cut could be delayed until the second quarter. "

Ian McCafferty, the chief economic advisor to the CBI, called on the Bank not to forget the vulnerability of the economy. "Recent, more positive, messages from the high street and the housing market may provide food for thought," he said. "But, if the better than expected inflation news continues and until the recent retail rally proves sustainable, the Bank needs to remain sensitive to the underlying fragility of the market."

The Bank's decision was backed by the The Times Shadow MPC, which voted unanimously that rates should be left on hold this month.

Andrew Sentance, the chief economist of British Airways and the newest member of The Times’s panel, said that there were "some positive signals" from the consumer. "The inflation outlook is fairly benign, but the trends from the real economy don’t point to the need for a cut," he said.

Other Times panel members, including Sushil Wadhwani, a former member of the Bank’s MPC, and Anatole Kaletsky, The Times’s chief economics commentator, both of whom backed a rate cut in November and December, said the Bank should continue its "wait and see" policy.

Hopes of an early rate cut were boosted last month with news that Stephen Nickell, a member of the MPC, broke ranks with colleagues to vote for a quarter-point reduction at the December rate-setting meeting. The minutes of the meeting also revealed a more dovish tone with growing concerns expressed about growth prospects.

But recent data reporting stronger than expected service sector activity and signs household spending is accelerating have led some economists to predict the next move in rates could be upwards.

One factor complicating matters for forecasters is the departure at the end of the month of Sir Andrew Large, a deputy governor, and interest rate hawk. "It is possible that Large’s successor, Sir John Gieve, is more amenable to arguments for lower rates," Philip Shaw, chief economist at Investec, said.

The European Central Bank also left eurozone interest rates unchanged at 2.25 per cent today.

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