Oct. 7 (Bloomberg) -- Growth in the U.K. economy may have slowed to 0.3 percent in the three months ended Sept. 30, raising the possibility of further interest-rate reductions, the National Institute of Economic and Social Research said today.

Gross domestic product may have eased from 0.5 percent in the three months through June, said the London-based institute, whose clients include the U.K. Treasury and the Bank of England. A 0.9 percent slide in August industrial production contributed to the slowdown, Niesr said in a statement.

Sputtering factory output and a slowdown in consumer spending are dimming the outlook for Europe's second-biggest economy, forcing Chancellor of the Exchequer Gordon Brown to retreat from his March growth forecasts and raising the likelihood that the Bank of England will lower the repurchase rate before the yearend. The central bank left interest rates unchanged yesterday.

``There seems to be increasing evidence that the economy is growing at below its trend level,'' said James Mitchell, a researcher at Niesr, in a telephone interview. ``If output growth continues the way it is going it would add to the case for the bank to lower interest rates.''

Brown told the financial committee of the International Monetary Fund on Sept. 24 that the U.K. economy is likely to expand at or ``slightly below'' its trend rate, which the Treasury estimates at 2.5 percent. In his March budget, he predicted growth of between 3 percent and 3.5 percent this year.

The Bank of England lowered its repurchase rate to 4.5 percent in August, a move opposed by four of the nine-member Monetary Policy Committee including Governor Mervyn King. Yesterday's decision to keep the rate unchanged had been expected by 40 economists surveyed by Bloomberg.

Inflation

Gross domestic product rose an annual 1.5 percent in the second quarter, the smallest increase in around 12 years. Still, policy makers must weigh that slowdown against signs of an acceleration in inflation amid soaring oil prices, Mitchell said. The inflation rate rose to 2.4 percent in August from 2.3 percent in July, above the 2 percent targeted by the central bank, the government said on Sept. 13.

``This will make their task even harder,'' he said. ``The Bank of England needs to make no firm moves for now and see how the data develops and how oil prices feed through into inflation.''

To contact the reporter on this story: Sam Fleming in London at sfleming5@bloomberg.net

Last Updated: October 7, 2005 01:14 EDT