LONDON, Nov 10 (Reuters) - British inflation will fall below target in two years' time, the Bank of England forecast on Wednesday, but stressed the outlook was highly uncertain and it stood ready to change policy in either direction.
While its quarterly Inflation Report left the door open for more quantitative easing, the BoE also said there was a wider than usual range of views among Monetary Policy Committee members on the prospects for both growth and inflation.
As such, the report is unlikely to settle the debate about what the central bank will do next, with analysts divided over whether the BoE will follow the U.S. Federal Reserve down the path of further monetary easing.
Minutes of the BoE's last meeting -- when it kept interest rates at a record low of 0.5 percent and froze its 200 billion pound QE plan -- will be published next Wednesday.
Policymakers were split three ways in October, with one voting for higher rates, one arguing for more QE and the remaining seven keeping policy on hold.
The BoE report showed inflation at around 1.6 percent on its two-year policy horizon, assuming interest rates rise very slowly in line with market expectations.
That was slightly higher than the August projection and the near-term inflation profile has also been revised higher so that CPI remains above the two percent target throughout 2011, because of a planned VAT sales tax rise and higher import costs.
"As the impact of those factors on inflation diminishes, inflation is likely to fall back, reflecting continued downward pressure from the persistent margin of spare capacity," the BoE said in its report.
"But the timing and extent of that decline in inflation are highly uncertain."
The BoE said economic growth would slow in 2011 but then pick up to just over 3 percent in two years' time.
These forecasts were also highly uncertain, however. Exports had still not picked up as the BoE had expected and, while domestic demand could grow rapidly if confidence recovers, there were also significant downside risks.
"Some households may not yet have fully adjusted to forthcoming fiscal consolidation," the BoE said.
(Editing by Ruth Pitchford)