Bank's King to leave door open for more QE if needed

Bank of England Governor Mervyn King looks set to leave scope for further gilt purchases to boost the economy when he presents new economic forecasts later on Wednesday, but will resist calls to do more to kick-start bank lending.

Last week the Bank's Monetary Policy Committee voted for another 50 billion pounds of quantitative easing over the next three months, taking the total to 325 billion pounds, and King's presentation of the Inflation Report should signal whether any more is likely.

Economists polled by Reuters expect the forecasts to show that inflation in two years' time - the key horizon for monetary policy - will be 1.6 percent, higher than the 1.3 percent it saw in November, but still below its 2 percent target.

"We expect the Inflation Report to leave the door open for further easing, but not to tie the MPC's hands," said Philip Rush, an economist at Nomura.

Figures on Tuesday showed that inflation fell to 3.6 percent in January, its lowest in more than a year and well below the three-year peak of 5.2 percent which it hit in September.

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November's forecast made more QE in February look like a done deal in the view of many economists, but a forecast nearer 2 percent would allow the Bank more latitude to make a judgement on QE in May based on market and economic conditions, Rush said.

Markets will also be keeping a close eye on whether King adjusts his generally downbeat view of the economy, and in particular the risks coming from the euro zone debt crisis.

The Bank's last central projection in November - which did not factor in a disorderly Greek debt default - saw the economy stagnating for much of 2012, and economists expect February's forecasts to be cut fractionally to show 1.3 percent annual growth by the fourth quarter of the year.

King will also face questions on the broader issue of whether gilt purchases alone are the best way for the central bank to kickstart faltering growth.

Adam Posen, the most dovish current member of the MPC, has promoted this course, urging the Bank to get involved in buying securitised packages of business and home loans, as well as to support a state investment bank.

But King has strongly resisted this, saying it is the job of the Treasury to take such decisions.

(Reporting by David Milliken; Editing by Catherine Evans)