By Brian Swint Oct. 3 (Bloomberg) -- Bank of England policy makers may cut the benchmark interest rate next week by the most since 2001 as the British economy hurtles toward a recession, economists say. Citigroup Inc., BNP Paribas SA, JPMorgan Chase & Co. and Royal London Asset Management today changed their forecasts to predict a half-point reduction from the current 5 percent on Oct. 9. Investec Securities, Bank of America Corp., Deutsche Bank AG and UBS AG this week forecast a quarter-point cut. ``We've got a severe financial crisis that has worsened in the past week and clear signs the economy is falling off a cliff,'' Michael Saunders, chief western European economist at Citigroup, said in an interview. ``The balance of risks has shifted decisively to the downside.'' Services industries from banks to hotels shrank by the most on record in September as the global financial crisis threatened to throw the economy into the first recession since 1991. The Bank of England, which has provided extra funds to the market as banks hoard cash, hasn't lowered interest rates since April on concern about the fastest inflation in a decade. The last time the U.K. central bank lowered the rate by a half-point was in November 2001, in the aftermath of the Sept. 11 terrorist attacks. Barclays Plc, ABN Amro NV, Morgan Stanley and Commerzbank AG predict a quarter-point reduction next week. The nine-member Monetary Policy Committee voted 8-1 to keep the rate unchanged last month, with David Blanchflower supporting a half-point cut. Blanchflower's View Blanchflower said he'll argue for a cut again next week, in a newspaper interview published today. Citigroup's Saunders said Blanchflower may want an even bigger reduction than half a point. ``Things have changed dramatically,'' Ian Kernohan, an economist at Royal London Asset Management in London, said in an interview. ``This morning's data from the U.K., plus the run of data we've had elsewhere and events in financial markets, just heighten the risk of a much more severe slowdown.'' The U.K. central bank today announced a wider range of collateral in its three-month money auction to assist banks. The three-month interbank lending rate surged to 6.31 percent on Oct. 1, the highest this year. It was at 6.27 percent today. ``In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity,'' Governor Mervyn King said in a statement. ``They're nervous, understandably,'' said Grant Lewis, an economist at Daiwa Securities SMBC Europe in London and a former U.K. Treasury official. ``The less collateral you can use in the private repo, the tighter the liquidity position of financial institutions.'' He predicts a quarter-point reduction. Higher money market rates are curbing demand for loans to households and consumers. House prices had the biggest annual drop since at least 1991 in September, Nationwide Building Society said yesterday. British banks plan to scale back loans further in the final quarter of the year, a Bank of England report showed. ``The fallout from the credit crisis is clear,'' said JPMorgan economist Malcolm Barr in a note. ``With the data deteriorating rapidly and prompting a quicker MPC response, we are lowering the forecast for the low in policy rates to 3 percent.'' To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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