* Inflation seen undershooting target, big risks both ways
* BoE leaves door open to more QE, but also ready to tighten
* Inflation Report does little to settle debate over policy
(Recasts, adds context)
By Sumeet Desai and Matt Falloon
LONDON, Nov 10 (Reuters) - The Bank of England looks set to keep monetary policy on hold for some time to come after its latest forecasts on Wednesday highlighted an uncertain outlook for the economy and a wide range of views among policymakers.
Sterling rose sharply and British government bond futures dropped, suggesting investors think it is now less likely Britain's central bank will join the U.S. Federal Reserve in injecting more stimulus into the economy.
The BoE's quarterly Inflation Report did leave the door open to more quantitative easing -- buying assets with newly-created money -- if needed, but Governor Mervyn King said policymakers stood ready to act in either direction.
King stressed big upside and downside risks to both inflation and growth and said the fate of Britain's recovery would rely heavily on the strength of the global economy.
"We cannot be sure which of the big risks to the outlook will materialise," King told reporters.
"Given the scale of the fall during the recession, the level of output is likely to remain weak."
Britain's economy has rebounded strongly from an 18-month recession, posting its strongest six-month period of growth for a decade in the middle of this year. But government spending cuts and tax rises are expected to weigh on activity next year.
Meanwhile, inflation has remained higher this year than the BoE anticipated.
The BoE expects inflation to remain above its two percent target next year before falling sharply to stand below target in two years -- the horizon on which the central bank sets policy.
Growth is seen slowing in 2011 but then picking up to just over 3 percent in two years' time.
VIGOROUS DEBATE
King said there was "vigorous debate" and a wider than usual range of views over the risks to inflation and growth among Monetary Policy Committee members.
That range of views, expressed in the broad spectrum of outcomes the central bank has factored in for the next two years, makes it more likely that policy will remain on hold until the economic outlook becomes clearer.
"The committee is still relaxed over the inflation outlook but is not sufficiently concerned over economic prospects to sanction a further round of QE", said Philip Shaw, chief economist at Investec.
The BoE's inflation forecast -- around 1.6 percent in two years if interest rates creep up as markets expect -- was a touch higher than August's projection. The near-term profile was also higher due to a VAT tax rise and increased 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."
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 and could give a better idea of where the MPC's policy bias lies.
Policymakers were split three ways in October, with one voting for higher rates, one arguing for more QE and the remaining seven favouring keeping policy on hold. (Additional reporting by Fiona Shaikh, David Milliken, Christina Fincher and Peter Griffiths; Editing by Catherine Evans and Sujata Rao)