(Adds details, reaction)
By Matt Falloon and Sumeet Desai
LONDON, Nov 10 (Reuters) - British factory costs fell by a record 5.6 percent in October as oil prices dropped nearly a fifth, official data showed on Monday, in a sign inflationary pressures are starting to come off the boil rapidly.
The figures added to growing evidence confirming that inflation is no longer the biggest problem facing Bank of England policymakers and reinforced expectations that more economy-boosting interest rate cuts are on the way.
"At this rate, it might not be long before the Monetary Policy Committee starts to worry about deflation," said Paul Dales, economist at Capital Economics.
The data from the Office for National Statistics also showed factory output prices fell one percent last month, the fastest since records started in 1986 and taking the annual rate of increase down to 6.8 percent from 8.5 percent in September.
Annual input price inflation nearly halved to 13.8 percent from 24.0 percent as oil, fuel and metal prices continued to come down sharply from peaks reached earlier in the year.
Consumer price inflation is running at 5.2 percent but the BoE slashed interest rates by 1.5 percentage points to 3 percent last week because of growing concerns that a weakening economy could soon drive inflation below the 2 percent target.
"The spectre of rising inflation is now pretty much dead and we expect the Bank of England to confirm that when they publish the inflation report on Wednesday," said Adam Chester, an economist at HBOS.
INFLATION REPORT
The BoE's quarterly inflation forecasts this week are likely to show price pressures cooling quickly in the coming months, opening the door to further cuts in interest rates to try to prevent a deep recession.
Britain's economy shrank a bigger than expected 0.5 percent in the third quarter and is expected to continue contracting well into next year as the financial crisis, a slumping housing market and rising unemployment take their toll.
The cost of crude oil, one of the principal drivers behind the global spike in inflation this year, fell by 19.5 percent in October alone -- the sharpest monthly drop since December 2000, the ONS said.
But that still left oil prices 9.7 percent up on a year ago. Oil prices have fallen sharply from record highs hit above $147 a barrel in July to trade just above $60 a barrel as markets factor in the prospect of a global economic downturn.
Imported metal prices fell 5.1 percent on the month in October, the ONS said, the biggest fall since records began in 1991. (Editing by Andy Bruce)