The Bank of England kept its benchmark borrowing rate on hold at 5.25% yesterday, although it is widely predicted to rise to 5.5% in May.

While the decision provides some respite for homeowners - the Bank's monetary policy committee has increased rates three times since August - there remains concern about the need to control inflation, which rose to an annual rate of 3% in December, the highest in 10 years.

Sterling fell against both the dollar and the euro after the MPC's decision was announced, with traders trimming bets on how far rates will rise in the months ahead.

Last night, sterling was $1.9719, compared with $1.9763 at the previous close.

Economists and traders were certain the central bank would tip rates before the summer - but opinion had been split between a hike this month or in May.

Official figures yesterday were mixed, but the MPC clearly preferred to wait for the Quarterly Inflation Report next month before deciding.

On one side of scale lay the blow to the recent recovery of the manufacturing sector, after official figures revealed a surprise drop in activity during February.

The Office for National Statistics said factory output fell by 0.6% in the month, dashing hopes in the City for an improvement of 0.3% or more. Output also eased by 0.2% in January - bolstering the case to keep rates on hold.

Economists now predict overall GDP growth of 0.6% for the first quarter of 2007, with the strength of that figure stemming from the services sector.

Meanwhile, on the other scale, Mervyn King, the Bank of England's governor, said last week that house price inflation may be starting to slow- but the latest Halifax numbers yesterday revealed a rise of 1% in March, taking the annual three-month rate to a two-year high of 11.1%.

The cost of an average home stood at £194,362 last month.