Prospects of an early cut in interest rates received a boost with Government data showing an unexpected fall in factory gate prices.

Output prices dropped by 0.1 per cent between September and October - taking the annual rate to its weakest level since June and easing concerns about inflationary pressures.

This compared with a 0.7 per cent rise the previous month and contrasted with analysts' forecasts of another increase. The figures from the Office for National Statistics also showed manufacturers battled with higher input prices but found it difficult to pass them on to their customers.

Economists at banking group ING said the data was "substantially softer" than expected.

ING said: "Overall, this report suggests that inflation pressures are not as strong as some have feared and in an environment of subdued economic activity, we do not expect them to pick up substantially."

It believed consumer inflation would also start to decline in the coming months and fall below the Bank of England's two per cent target in the new year.

"This could leave the door open for rate cuts, starting with a move in February," it added.

The ONS said input prices rose by 7.7 per cent in the year to October, mainly reflecting fuel price rises.

The fall in output prices was driven by a large decline in the price of scrap steel. Core output prices - which exclude food, drink, tobacco and petrol products - fell by 0.3 per cent over the month, the biggest decline since July 1999.

Economist Jaspreet Sehmi at the Centre of Economics and Business Research said: "The fall in producer prices will help to reduce inflationary pressures.

"We expect that the Bank will hold interest rates at the current rate for some time, however, as growth remains close to the UK's long-term trend rate and oil prices remain relatively high."

Jonathan Loynes at Capital Economics said the figures were "the strongest signal yet that pipeline price pressures have finally started to ease".

Howard Archer, an economist at Global Insight, said: "The marked easng back in core producer output inflation should temper concern within the Monetary Policy Committee that underlying inflationary pressures are building up as a result of persistently high oil prices."

Although most economists now believe that rates will be kept on hold until next year, they are divided on when the Bank will make another move and in which direction.

The ONS is due to publish inflation data today, with analysts predicting the annual rate of consumer prices index (CPI) inflation will have slowed to 2.4 per cent in October from 2.5 per cent the previous month.

Meanwhile the British Chambers of Commerce was taking a more downbeat view of the economy.

It cut its growth forecast to 1.6 per cent from two per cent in August, saying household consumption would be weaker than previously thought and that manufacturing would remain subdued.

"The slowdown in UK GDP growth is mainly being driven by sharply lower growth in household consumption as the cooling housing market and the higher personal debt burden dampen spending," BCC economist David Kern said.