Pressure is building on the Bank of England to cut interest rates for a second time next week as service sector activity in December continued to languish near a four-and-a-half-year low and pay increases reached 4 per cent.

According to the Chartered Institute of Purchasing and Supply, service sector activity, which measures trade in transport, communication, financial and business services, hotels and restaurants, rose from 51.9 per cent in November to 52.4 per cent at the end of 2007.

Despite the small increase, service sector activity was still at its lowest point since May 2003. Business confidence on the other hand fell from 69.6 in November to 67.5 per cent in December, the worse level since November 2001, as more companies expressed concern about uncertainties in the global economy.

At the same time, the rate of pay increases in the UK rose from 3.4 per cent in the three months to December to 4 per cent fuelled by a rise in Retail Price Inflation which increased from 4.2 per cent in October to 4.3 per cent in November.

Next week the Bank of England will decide on whether to cut interest rates after reducing borrowing costs in December by a quarter point to 5.5 per cent - the first interest rate reduction since August 2005.

Howard Archer, chief UK and European economist at Global Insight, said that while a further interest rate cut is expected early this year, the Bank's Monetary Policy Committee may wait before making a move to assess the full extent of pay settlements in early 2008, as well as expected figures on retail spending during December and activity in the housing market.

Mr Archer said: "If consumer spending was muted and house prices fell markedly further in December, it would significantly bolster the case for the Bank of England to step in with an immediate further interest rate cut.

"However, if consumer spending appears to have held up relatively well in December, it would increase scope for the MPC to remain on the sidelines for another month while it gauges how growth and inflation is developing."

According to figures released today by the Bank of England, mortgage approvals in November - prior to an interest rate cut - fell to a three-year low of 83,000 although more individuals are using their homes to raise funds, with remortgages rising to 99,000 in November compared to 95,000 in October and 88,000 in the previous month.

Total net lending in November remained subdued in November at £8.9 billion, the same rate as October and below the six-month average of £9.9 billion.

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