* WHAT - Bank of England's quarterly inflation report
* WHEN - Wednesday, Feb 10 at 1030 GMT
* BoE to lower GDP forecasts, raise near-term CPI profile
By Christina Fincher
LONDON, Feb 8 (Reuters) - The Bank of England looks set to leave the door open to further monetary easing and admit the recovery may be weaker than it had hoped when it publishes new quarterly forecasts on Wednesday.
In November, the central bank's modal growth projections suggested annual growth of 2.2 percent in 2010, rising to an even punchier 4.1 percent in 2011.
However, these forecasts did not fully account for a fiscal squeeze that now looks inevitable, and 14 of 19 economists polled by Reuters expect the BoE to revise its 2010 GDP forecast lower. [ID:nLDE614167] Britain's central bank paused its pro-growth quantitative easing programme last week, as expected, citing the prospect of a "gradual recovery". But it was at pains to point out that the halt was not necessarily definitive and the programme would be restarted if needed.
It also re-iterated its belief that inflation, which surged to 2.9 percent in December and looks set to go even higher, would fall back below its 2 percent target in due course.
"While we believe this month's pause marks the end of the QE programme, the risk of a double-dip in economic activity means that we can't fully write off the chance of further stimulus just yet," said George Buckley, UK economist at Deutsche Bank.
MARKET REACTION
Key to the market's reaction will not be the BoE's near-term inflation forecasts, which look certain to be revised higher, but where it thinks inflation will be in two years' time.
In November, the BoE sparked a gilt market rally by forecasting inflation would be 1.6 percent in two years if monetary policy were tightened in line with market expectations -- well below its 2 percent target.
- Another sub-2 percent reading on this measure would signal markets are still ahead of themselves in pricing in rate hikes, lifting gilts and knocking the pound.
- Conversely, a forecast that inflation would be above 2 percent in two years assuming market interest rates would signal investors need to brace themselves for more aggressive monetary tightening. Gilts and interest rate futures would tumble, while sterling could snap back from an 8-month low against the dollar.
Uncertainty over the amount of spare capacity in the economy and the extent to which fiscal policy will be tightened after an election expected in May make the BoE's longer-term forecasts difficult call.
In a Reuters poll, 5 economists predicted the BoE would revise up its 2011 inflation forecast, 7 predicted it would be unchanged and 4 predicted it would revise it down.
A combination of strong inflation data and weak growth figures have led to choppy moves in money markets, which have pushed back the timing of an expected UK rate hike to November from August.
Michael Saunders, an economist at Citi, said debate around the level of spare capacity in the economy remained crucial.
"The inflation report will probably admit that inflation is likely to exceed 3 percent soon, but argue that the big output gap will lower inflation medium-term and allow for a fairly long period of relatively low policy rates," he said.
(Editing by Toby Chopra)