Got to thinking about the arrow keys not working on your keyboard, and remembered encountering a similar circumstance when setting up my Pi.
Special characters where not typing correctly, and thus when I changed the default password from a SSH session, it could not be reproduced with the keyboard connected to the Raspberry Pi, or from the SSH session. I discovered that not only was the keyboard layout wrong, but the language was also. Until I corrected both, special characters did not type correctly. Perhaps something similar is preventing your arrows keys from working.
For me the correct keyboard Layout was Generic 104-Key PC, and the correct language was en_US.UTF-8 UTF-8