The Bank of England has resisted calls to cut interest rates for the second month in a row after it held the cost of borrowing at 5.5%.

The Bank's Monetary Policy Committee surprised the markets with a 0.25% reduction in December, and businesses had called for another downward move this month to head off the threat of a recession.

It comes after retailers experienced a slowdown in Christmas trade with big firms such as Marks & Spencer, Next and Currys owner DSG International all reporting a slump in consumer spending.

Recent housing market figures have also put the MPC under pressure to cut rates after Halifax revealed the first quarterly fall in prices since 2001.

And manufacturing and service sector firms have returned downbeat data, with some experts warning the economy is facing a significant squeeze during 2008.

But the Bank is also charged with keeping inflation under control, and with the benchmark Consumer Prices Index currently running above its target of 2%, it has decided to see what the full effects of December's cut will be before moving rates again.

The CBI's economic adviser Ian McCafferty said: "Inflationary pressures from energy and food costs remain worrying. What probably tipped the balance in the 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."

Graeme Leach, chief economist at the Institute of Directors, said: "The Bank of England went for hold instead of bold and probably made the right decision.

"The Bank has decided to wait another month in order to fully assess the growth and inflation performance over the December-January period.

"With oil prices nudging $100 and a general energy price spike, January's inflation number could turn out bad.

"The Bank retains a bias towards easing and in all likelihood will act in February providing the January CPI isn't too bad."

Global Insight's chief UK economist, Howard Archer is also predicting rates will be cut next month and believes they could fall as low as 4.5% by the end of the year.

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