Prices paid by British factories for raw materials tumbled at a record pace during October, heightening expectations that inflation is set to fall sharply and could dip well below the Bank of England's 2 per cent target.

Factory costs fell by 5.6 per cent during October, the biggest monthly fall since 1986 due mainly to a steep decline in the price of oil.

Sterling denominated crude oil prices fell by 19.5 per cent during the month on fears that the deteriorating global outlook could hamper demand for fuel.

However, manufacturers are facing restrictions on pricing power as consumer demand wanes was underlined by a record fall in the price of goods leaving factories.

Factory-gate prices dropped by 1 per cent during October, the largest single month decline on record and the third fall in a row.

Economists said factories could be forced to cut their prices even more in a bid to attract custom. Howard Archer, chief UK and European economist at IHS Global Insight, said: "We suspect that producer output prices could see year-on-year falls in the second half of 2009."

Inflation hit a 16-year high of 5.2 per cent in September, but figures published this week by the Bank of England are expected to show that the central bank expects inflation to fall sharply, indicating that more rate cuts could be on the way.

Last week, the Bank of England cut the interest rate by 1.5 per cent to 3 per cent.

Mr Archer said: "We expect the Bank of England to cut interest rates by a further 50 basis points from 3 per cent to 2.5 per cent in December and to bring them down to 1.50 per cent by mid-2009 as it attempts to limit the length and depth of the recession."

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