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By Lee Wild

Date: Monday 13 Oct 2008

LONDON (ShareCast) - Andrew Sentance has raised hopes that UK interest rates may fall further after the usually hawkish Bank of England policymaker admitted Britain will likely fall into recession.

"The combination of exceptional turbulence in the financial system and evidence of a further softening in the real economy has significantly shifted the balance of risks for the UK economic outlook," he said.

"It now seems to me more likely than not that we will see a fall in GDP for the third and fourth quarters of this year, satisfying the technical criteria which many economists use to define a recession.”

Sentance voted to hike borrowing costs six times between January and July last year as rates rose from 5% to 5.75%. He’s called for rates to remain there since March 2008.

But today’s comments suggest that receding inflation fears have convinced the Monetary Policy Committee member to back a further reduction following last week’s emergency half point cut to 4.5%.

"The MPC has received quite a bit of reassurance on medium-term inflationary pressures over the last few months,” he said. “We can now be more confident than we were a few months ago that inflation will come back to the 2% target over the medium term."

Last week’s emergency interest rate cut will likely be followed by a string of further reductions, say analysts, after UK producer prices fell for the second month in a row in September.

A report from the Office for National Statistics out today revealed that UK producer prices fell for the second month in a row in September.

Output prices fell 0.3% last month from the previous month’s level. They dropped a record 0.7% in August.

Many analysts think rates are set to tumble over the next year, possibly as low as 3% by the end of 2009.

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