James Cooper, policy adviser at Birmingham Chamber of Commerce and Industry, ponders this week's interest rate decision...

Should the Bank of England cut interest rates? What factors will affect its decision? And what outcome will Birmingham businesses be looking for?

It is useful to begin by reminding ourselves of the most important criteria that the Monetary Policy Committee will use in making its decision tomorrow.

One of its key aims is to maintain monetary stability. The Government has made it a legal requirement for the BoE to meet a two per cent inflation target, while the Bank itself aims to ensure non-inflationary growth within the economy.

Official figures suggest the Bank is meeting its targets.

The latest statistics available show that the Govern-ment's official measure of inflation, the CPI index, fell to 2.1 per cent in November.

Nationally, year-on-year output growth was forecast to be 1.7 per cent, which although reasonable is below trend considering the Bank's initial prediction of 2.5 per cent. And manufacturing is in recession, with output contracting at a rate of 0.4 per cent a year.

Several retailers have reported strong pre-Christmas sales, with annual sales growth recorded at 1.7 per cent for December. Growth in house prices has begun to rise again and the service sector is also currently showing some positive signs.

In Birmingham however, the economy is demonstrating some worrying indicators.

In November unemployment within the city stood at 8.5 per cent, compared to 2.4 per cent within the UK as a whole.

The Chamber's last Quarterly Economic Survey of 2005 showed that confidence in profits, domestic forward orders and cash flow among the city's service sector businesses had fallen to their lowest levels since 2003.

Recruitment halved among service sector businesses between the third and fourth quarters of the year, while Birmingham manufacturing is suffering from weak domestic sales and labour markets, cash flow problems, falling intentions to invest and the rising price of raw materials.

So what does this mean for interest rates?

It is tempting to examine the Birmingham economic picture and call for a cut to stimulate consumer spending and investment.

This is reinforced nationally with the economy under-performing in terms of growth - especially within the receding manufacturing sector - inflation returning to its two per cent target and wage pressures remaining modest.

But the Bank will need to continue to be wary of inflationary pressures.

There is still widespread fears over the current cost of energy, cited as the greatest concern among both service sector and manufacturing firms within Birmingham.

And, although businesses are not currently expressing increased intentions to pass these costs on to their customers, there is a danger that this situation could change, which could in turn induce a period of increased inflation.

A cut in interest rates may offer some respite to Birmingham's economy, but firms will be more wary of the dangers of inflation to their business, a factor which will be decisive in the MPC's announcement.