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Bank of England's Bailey speaks after rate increase

LONDON (Reuters) - The Bank of England raised interest rates to 3% on Thursday from 2.25%, its biggest rate rise since 1989 as it warned of a "very challenging" outlook for the economy.

Below are quotes from Governor Andrew Bailey and other top officials from the British central bank who were speaking at a news conference.

BAILEY ON CURRENT INFLATION

"If we do not act forcefully now it will be worse later on."

BAILEY ON INFLATION EXPECTATIONS

"We can't make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets."

"The central projections conditional on the market implied path of Bank Rate serve as a reminder that we should not increase Bank Rate too far. The MPC judges that the path of the Bank Rate required to return inflation sustainably to target is shallower than that priced into financial markets."

BAILEY ON HOW HIGH RATES MIGHT GO

"The Committee will not pursue a path that we think will drive inflation far below target. The MPC does not follow the market; it sets the level of Bank Rate to return inflation to the 2% target sustainably, and in a way that avoids undesirable volatility in output."

BAILEY ON UPSIDE INFLATION RISKS

"Just to put it simply, yes, we project a steep fall in inflation, but there are substantial upside risks to that path."

DEPUTY GOVERNOR DAVE RAMSDEN ON MARKET CONDITIONS

"That (the two-year swap rate) obviously hasn't fed through into mortgage pricing yet which was the point Andrew (Bailey) was just alluding to, but although we're seeing those kind of round trips, whether there, or in the 10 year bond yield, it's clear that markets remain febrile.

"There's illiquidity across different parts of the market. So I think things have not settled down yet and that's obviously something that we're very focused on in terms of monitoring market conditions."

BAILEY ON RATE PATH

"Our best view of what the rate should be given the situation, circumstances and the evidence we have to date, is nearer to the constant rate curve than the market curve is to the constant rate curve currently."

(Reporting by UK bureau; editing by William James)