UPDATE - Bank of England raises borrowing costs to highest level since late 2008

ADDS REMARKS FROM BANK'S GOVERNOR

By Aysu Bicer

ANKARA (AA) - The Bank of England raised interest rates Thursday by 75 basis points to 3%, marking its largest hike since 1989 and bringing borrowing costs to their highest level since late 2008.

The increase from 2.25% came after a 7-2 vote by the bank’s monetary policy committee whose latest projections indicated "a very challenging outlook for the UK economy."

Inflation hit a 40-year high in September, rising to 10.1% and that number is expected to further increase to around 11% in the fourth quarter, well above the bank's 2% target.

The central bank also said additional hikes may be needed for a sustainable return to the inflation target.

The British pound was down following the rate announcement and warning of a recession. It dropped 1.5% to 1.123 against the greenback and 0.9% lower versus the euro at 1.16.

Bank of England Governor Andrew Bailey acknowledged that eight rate increases since last December are "big changes and they have a real impact on people's lives."

Defending the hike, he said: "If we do not act forcefully now, it would be worse later on."

He said projections indicate "there is a tough road ahead," adding that the country is poorer because of war-driven energy prices.

- 'Recession for a prolonged period'

The Bank said the country is “expected to be in recession for a prolonged period and CPI inflation would remain elevated at over 10% in the near term."

It predicted that the economy entered a recession in the third quarter and the downturn will last until mid-2024.

It also said GDP will be down in 2023 and into the first half of 2024 "as high energy prices and materially tighter financial conditions weigh on spending."