Fears of a back-to-back rise in UK interest rates proved unfounded yesterday when the Bank of England stood pat, but economists and business leaders warned it might prove only a temporary reprieve.

FEARS of a back-to-back rise in UK interest rates proved unfounded yesterday when the Bank of England stood pat, but economists and business leaders warned it might prove only a temporary reprieve.

Sterling tumbled after the interest rate announcement at noon. This fall in the pound reflected the City's great uncertainty ahead of the rate call over whether the Bank's Monetary Policy Committee, having sprung a surprise quarter-point rise in base rates to 5.25% last month, would raise unexpectedly again at the end of its latest monthly meeting yesterday.

Economists stuck with predictions the MPC would still move rates up in coming months. The committee has implemented three quarter-point rises so far this cycle, with the others having come last August and November.

The outlook should become clearer when the MPC publishes its latest quarterly inflation and growth forecasts next Wednesday. Yesterday's decision would have been based on these projections and the MPC would also have seen January inflation figures due for official release next Tuesday.

Benchmark annual UK consumer prices index inflation jumped from 2.7% in November to 3% in December, meaning Bank governor Mervyn King avoided by a hairsbreadth having to write to Chancellor Gordon Brown explaining why it had risen more than one percentage point above the MPC's 2% target.

Minutes of this week's MPC meeting will be published on February 21. This will reveal whether or not a minority of MPC members pushed unsuccessfully for a second consecutive rate rise in yesterday's vote.

January's rate increase squeezed through on a five-to-four decision.

With King having predicted in a speech last month that UK inflation could fall "possibly quite sharply" in the second half of this year, yesterday's no-change decision might give the MPC breathing space to see if the forecast downward impact from energy prices comes to pass. British Gas's surprisingly large respective cuts of 17% and 11% in residential gas and electricity prices from March 12, unveiled to a stunned marketplace yesterday, should help inflation fall.

However, most economists last week predicted at least one more rise in rates this cycle and they appeared to be sticking with these forecasts in spite of yesterday's no-change decision.

Even the Confederation of British Industry, which represents manufacturers which would come under pressure from any strengthening of the pound if interest rates rise, was swift to highlight the potential need for another increase.

CBI chief economic adviser Ian McCafferty cautioned: "The economy is still growing rapidly and concerns remain about more ingrained inflation, with firms putting up prices in the face of a profit squeeze and a far from certain outcome in the current pay round. So, it is too early to say if interest rates have peaked."

Among the most hawkish is Capital Economics' Roger Bootle, adviser to accountancy firm Deloitte, who said yesterday it was "perfectly possible that interest rates will eventually need to rise as far as 6%".

However, Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club and one of the minority believing rates could have peaked already, said: "I think the MPC will wait to see how things develop. The strong growth in UK labour supply, based on immigration and the return of older workers to the workforce, and the fall in world oil and commodity prices should be sufficient to bring CPI inflation back down to the 2% target by the end of the year without another rise in interest rates."

Reflecting the current uncertainty over monetary policy, Spencer did hedge his bets by adding: "The MPC will not hesitate to raise interest rates to 5.5% if there are more definite signs of headline inflation pushing up wage settlements."

Lucy O'Carroll, director of research at HBOS's treasury services division, described the wait for yesterday's noon rate call as "nerve-racking".

Speaking shortly afterwards, she said: "Today's decision to hold rates at 5.25% was always the most likely outcome from the MPC's latest meeting. Ahead of time, however, a second pre-emptive strike could not be ruled out. January's shock rate rise, some strong (economic) data in the intervening period, and the fact that the committee went into this month's meeting armed with its new growth and inflation forecasts all added to the uncertainties.

"In the event, the MPC no doubt decided to take more time to gauge both trends in the current wage-setting round and the impact of recent rate increases on the economy. Furthermore, the committee is not panicking about inflation, despite the fact that it has drifted so far above target.

"As Bank governor Mervyn King made clear recently, the MPC takes the view that lower energy prices and the strength of the pound will help to bring inflation down, possibly quite sharply, in the second half of this year. For now, we may breathe a sigh of relief that the Bank has not sprung yet another surprise."

However, she predicted next week's inflation report would highlight upside risks to a "fairly benign" central picture of CPI inflation returning to the 2% target.

O'Carroll added: "A rate rise to 5.5% during the spring therefore remains in prospect, as the committee seeks to draw a line under pay growth and the continued strength of household spending."

Howard Archer, at Global Insight, said: "The Bank of England's inaction today may well have followed a close vote within the MPC and could prove to be only a temporary reprieve. We believe there is a strong chance that interest rates could well move higher as early as March."

The pound was last night down about one-and-a-quarter cents on its close in London on Wednesday at $1.8575. It was also weaker against the euro. The single currency, boosted by hawkish signals from the European Central Bank, was up about about half-a-penny at nearly 66.6p.