By Sumeet Desai and Christina Fincher

LONDON (Reuters) - Interest rates will need to fall in the next few months, the Bank of England signalled on Wednesday, as it predicted a worsening outlook for both economic growth and inflation.

In the quarterly Inflation Report, the central bank's first formal look at the economic impact of the credit crunch, it said growth would slow sharply to just over 2 percent next year even if its main rate fell from 5.75 percent.

Price pressures were stronger because of soaring energy prices and a falling pound against the euro, putting inflation above the 2 percent target for most of next year before settling back in the middle of 2009.

"The near-term outlook is less benign for both inflation and growth," Governor Mervyn King told a news conference, warning that more disruption in financial markets posed the biggest risk and stock markets around the world could still fall.

Experts took this as a sure sign the BoE would soon follow the U.S. Federal Reserve in lowering interest rates because of this summer's credit squeeze, as its forecasts assume a rate cut to 5.5 percent early next year and another later in 2008.

"Crucially, the BoE has validated expectations that we are going to see two or three interest rate cuts in 2008," said Alan Clarke, economist at BNP Paribas.

The pound fell to a four-year low against the euro and interest rate futures rocketed higher as dealers ratcheted up bets of monetary easing in the months ahead.

King said everything now would depend on the data. The Monetary Policy Committee had left interest rates at 5.75 percent last week because inflation was rising and it was still unsure whether the economy was set to slow more than it had envisaged in August, he said.