The Bank of England kept interest rates unchanged yesterday and economists are divided over whether two hikes in borrowing costs in the past four months have done enough to curb inflation.

Economists expected the bank would leave rates at 5 per cent and market reaction was minimal.

The outlook, however, is less clear and much will depend on the level of wage settlements in the crucial new year pay round.

"Today's decision was no surprise, but people should not be fooled into thinking interest rates have definitely peaked," said Graeme Leach, chief economist at the Institute of Directors. "It is still a 50-50 call as to whether interest rates go up again in the new year."

Britain's economy has given out mixed signals in recent weeks.

The housing market and services sector continue to accelerate, but manufacturing activity and consumer spending appear to be slowing.

Annual house price inflation hit a 20-month high in November, according to Halifax data, while the country's services sector grew at its fastest pace last month in almost three years.

Manufacturers and retailers look to be having a tough time. Industrial output contracted in October for the first time in over a year and evidence suggests that consumers are tightening their purse strings.