London - The British economy is already in recession and will shrink by as much as 2 per cent by early 2009, the Bank of England (BoE) said Wednesday.

The bank's quarterly inflation report, presented by central bank governor Mervyn King Wednesday, said the economic landscape had changed "dramatically" since August.

Interest rates could tumble to record lows next year, and perhaps to 1 per cent by 2010, as policymakers attempted to ward off a severe and prolonged recession, the report said.

King defended last week's sharp rate cut to 3 per cent, saying the bank acted "because the facts had changed."

"There are very few historical parallels to the current situation. Confidence has been shaken badly. All this will restrain demand looking into next year," said King.

"We have seen the biggest banking crisis since World War I," he added. It is coupled with a dramatic fall in business and consumer confidence and very sharp drops in commodity prices.

"The economy probably entered recession in the second half of 2008 and output is likely to contract further," said the report.

It coincided with the publication Wednesday of the latest unemployment figures, which showed that the number of jobless in Britain rose by 140,000 to 1.82 million in the three months to the end of September.

The unemployment rate rose from 5.4 to 5.8 per cent, its highest level since the late 1990s. (dpa)