The prediction follows the publication yesterday of producer price data showing a further easing in factory output inflation.

According to the Office for National Statistics, output prices rose 8.5 per cent year-on-year in September, down from 9.1 per cent in August and a peak of more than 10 per cent in July.

The data suggest that cost pressures on British manufacturers have eased markedly since the summer. Oil falling back from its July peak of more than $147 a barrel to about $80 will have been the single biggest factor.

Consumer price inflation hit 4.7 per cent in August and analysts expect a reading of about 5 per cent for September. However, price pressures are expected to ease next year – especially in light of recent falls in oil and other commodity prices.

Adding to the good news, yesterday's ONS report showed producer input prices falling by a further 1.2 per cent last month in reaction to lower oil, food and commodity prices. The year-on-year rise in input prices fell back to 24.5 per cent from a peak of 34 per cent in June.

Howard Archer, chief UK economist at Global Insight, said: "This eases the pressure on manufacturers to try to raise their prices.

"Even so, manufacturers' margins remain squeezed, which will weigh down on investment and employment, in tandem with very tight credit conditions and weakening demand."

Archer argued that the softer producer price data would "facilitate further interest rate cuts", following last week's surprise half-point cut by the Bank of England.

Global Insight expects borrowing costs to fall to 3 per cent, or lower, in 2009 from their current level of 4.5 per cent.

The producer price data came as central bank rate-setter Andrew Sentance stressed the need to keep one eye on the inflation ball.

Sentance – once regarded as one of the Bank of England's most hawkish policymakers – said it was "more likely than not" the UK would fall into recession in the second half of 2008.

And he warned that the risks of a harder landing for the economy had increased in recent weeks.

Sentance said: "The risk of a prolonged and severe period of falling demand and output – resulting in much more excess capacity than is necessary to ensure inflation returns to target – has increased."