Sterling rises, but set for largest weekly fall in six weeks

LONDON (Reuters) - Sterling rose on Friday but was still set for its largest weekly decline in six weeks after losing 2% following the Bank of England's (BoE) biggest interest rate hike in three decades.

At 1030 GMT, the pound was up 0.63% against the dollar at $1.12295, but down 3.3% on the week; its steepest weekly fall since the British government's now largely scrapped tax cutting mini-budget on Sept. 23.

The pound was 0.26% higher versus the euro at 87.115 pence per euro.

On Thursday, the BoE hiked its base rate by 75 basis points (bps) as it battles to bring down double-digit inflation. It said borrowing costs may not rise as sharply as some expect, but this was because Britain is facing the risk of its longest recession in at least a century.

It follows a hike by the Federal Reserve on Wednesday, though the U.S. central bank's accompanying messaging stands in contrast to the BoE's, with the Fed warning the peak in U.S. rates was likely to end up higher than traders expect.

"The main driver for cable this week was the sharp contrast between the hawkish Fed and the dovish BoE. Given the respective central bank developments, its not surprising that cable has dropped sharply," said Mizuho senior economist Colin Asher.

The U.S. dollar is 1.6% higher on the week; a bearish factor for the pound.

"The Fed's main concern remains inflation, while the BoE is much more worried about recession," Asher said.

BoE chief economist Huw Pill on Friday repeated the bank's message that rates were likely to go up but not by as much as investors had expected following the recent period of political and market turmoil in Britain.

The market is now awaiting a planned fiscal statement on Nov. 17 from Britain's new finance minister Jeremy Hunt, with indications there will be a squeeze on public spending and potentially higher taxes.

"The fiscal rigour brought by the new UK government may have already had a beneficial effect on the pound, and now the size of the current UK recession may become a primary currency driver," ING FX analysts said in a note.

(Reporting by Lucy Raitano; Editing by Mark Potter)