Economy seen to shrink

LONDON (Reuters) - The economy shrank by 0.2 percent in the third quarter, the National Institute of Economic and Social Research said Wednesday as it urged the Bank of England to cut interest rates by half a percentage point.

Each month the think tank estimates how fast the economy has grown over the past three months, and says its figure is usually within 0.2 percentage points of the estimate published later by the Office for National Statistics.

The Bank of England announces its October rate decision on Thursday, and most economists in an October 3 Reuters poll expected it to cut rates by at least a quarter point to 4.75 percent.

Since then, money markets show an increasing number of traders expect a half point cut.

The NIESR said last month the economy shrank by 0.2 percent from May to July, and that this month's estimate was the first calendar quarter contraction it had calculated since it started producing the series in 1998.

"Unless output growth resumes in the near future it will be reasonable to say that a recession began in May of this year," the think tank said.

"In view of these figures and of the intensifying banking crisis we take the view that the Bank of England should cut the interest rate by half a percentage point ... at its next meeting."

However, the NIESR said a rate cut was unlikely to provide an immediate boost to the economy and that the Bank of England should work with the government to ensure companies and households could continue to borrow.

The ONS publishes official third-quarter growth figures on October 24.

(Reporting by David Milliken, editing by Swaha Pattanaik)