The Bank of England's Monetary Policy Committee faces a difficult dilemma on Thursday when it meets to consider interest rates.

UK interest rates have been on hold at 4% for one year, but pressure is now building for a rate cut after the US central bank, the Federal Reserve, reduced US interest rates to a 41 year low of 1.25%, and half-point reduction.

The European Central Bank (ECB) is also expected to make a rate cut on Thursday, the same day the Bank will reveal its decision.

Both the US and eurozone economies are weaker than Britain's, but the UK cannot expect to grow strongly while the rest of world slips into recession.

Gordon Brown, the Chancellor, has already admitted that his growth forecast for 2002 was too high - and further downward revisions may lead to pressure for further tax rises.

And UK households are building up huge debts, only buoyed by a rise in the nominal value of their home.

Dual economy

The continuing rise in house prices highlights one of the main dilemmas for the Bank.

House prices are still rising at an annual rate of 22%, according to some surveys, despite a slowing at the top end of the market.

A survey of the private service sector, which makes up about two thirds of the UK economy, from the Chartered Institute of Purchasing and Supply (CIPS) showed higher levels of activity than expected.

And the CBI said high street shop sales had rallied to their highest level since May.

But the relatively robust figures contrasted strongly with official figures for manufacturing industry, which showed continued falls in output.

"It's the same old story with the discrepancy in the UK economy - manufacturers in trouble with little hope for improvement while the services sector remains in relatively good shape," said Audrey Childe-Freeman, an economist at CIBC World Markets.

Manufacturing output was down 0.4% in September according to figures from the Office for National Statistics (ONS) and is now 2.6% lower than at the same time last year.

Car output saw the biggest fall, down 12.2% in September

Currency worries

Another worry for the Bank of England could be the strength of the pound, especially if the US and ECB cut rates before the UK.

The UK is running a big trade deficit with Europe, and higher interest rates would tend to attract speculative investment and raise its value further.

That would worry manufacturers who have already been complaining about the problems for their exports.

Former MPC member backs cut

A former member of the Monetary Policy Committee, DeAnne Julius, has backed a rate cut.

She told the BBC Radio 4's Money Box Programme that d she would vote for a cut and put the figure at 0.25%, saying further cuts may be necessary later to counter the risk of deflation.

"I think [this] is the biggest worry the MPC must have to think about.

"If that is the direction we are going we need to leave a little ammunition still in our pack to be able to cut interest rates later, so I would not go overboard right now."