America's central bank kept interest rates on hold last night for the first time in almost a year, leaving its benchmark Federal Funds rate at 2 per cent, and gave warning that inflation will continue to rise.

The decision came as Warren Buffett, the billionaire investor, said that inflation in America was exploding and urged the Federal Reserve to remember its dual role of both nurturing economic growth and keeping costs stable.

In a statement alongside the Fed's decision, the bank gave no hint of when it may start to raise interest rates, signalling that it believes that the US economy is still mired in a recession. Ben Bernanke, Chairman of the Federal Reserve, is caught in a dilemma of trying to encourage an economic recovery with low interest rates and also of attempting to contain inflation by raising the cost of borrowing. Since last August the Fed has cut the cost of borrowing from 5.25 per cent.

In the statement, the Fed said: “Labour markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.” It added: “Uncertainty about the inflation outlook remains high.”

Nine members of the Federal Open Market Committee voted for the rate freeze, with one voting for a rise.

Americans are trying to cope with increasing unemployment - about 5.4 per cent of the US workforce are jobless - a housing slump, deteriorating credit conditions and soaring inflation. Although official figures have not confirmed the rate of contraction in the US economy, it is widely believed that the world's largest economy has fallen into a recession.

Wall Street broadly welcomed the rate decision. Ian Shepherdson, chief US economist of High Frequency Economics, said: “Whenever the economy is weak, the Fed can be relied upon to expect better times just around the corner. On the inflation front, commodity prices and higher expectations are cited again, but the important new element is the bald statement that ‘the upside risks to inflation and inflation expectations have increased'.”

He added: “When push comes to shove, we still expect Mr Bernanke, student of the Depression, to prevail and keep rates on hold through the summer.”

Mr Buffett, in an interview, said: “Inflation is really picking up. Whether it's steel or oil, we see it everyplace.” Official figures put US inflation at 4.2 per cent.

The Dow Jones industrial average was just in positive territory, closing up 4.40 points at 11,811.80. The price of light sweet crude oil slipped $2.19 to $134.81 a barrel in New York. Earlier, prices fell as much as $5 on a US Government report that oil inventories rose unexpectedly last week.

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