* WHAT: BoE Inflation Report and Governor's news conference
* WHEN: Wednesday, Feb. 16, 1030 GMT
* Upward revision to 2011 CPI, closer to 2 pct medium term
* GDP projection to be slightly lower than November
By Fiona Shaikh
LONDON, Feb 14 (Reuters) - The Bank of England is likely to smooth the way for a future rise in interest rates with its quarterly economic forecasts on Wednesday, and try to allay concerns that it is going soft on inflation.
The central bank left borrowing costs on hold at 0.5 percent this month, even though an estimate for January due on Tuesday is likely to have shown that consumer prices inflation climbed to 4 percent -- double its 2 percent target.
This would force BoE Governor Mervyn King to write another letter to finance minister George Osborne explaining the overshoot.
Investors reckon the central bank may have to start tightening policy sooner rather than later to bring inflation back on track, and money markets are almost fully pricing in a 25 basis point rise in borrowing costs by May.
Most city economists do not expect the central bank to start tightening policy until much later this year, however, highlighting the dilemma facing policymakers of how to tackle rising price pressures without derailing the economic recovery.
"Our forecast is for August, but I think there's wiggle room in both directions, and May is looking increasingly likely," said Alan Clarke, economist at BNP Paribas.
Inflation at the end of last year already exceeded the BoE's November Inflation Report forecasts, averaging 3.4 percent, and Governor King warned in January that surging oil and commodity prices could drive CPI up to almost 5 percent.
The BoE produces two forecasts for inflation -- one based on market interest rate expectations and one that assumes interest rates remain at 0.5 percent.
Analysts reckon that near-term inflation forecasts on both measures will be revised upwards to reflect a greater knock-on impact of rising commodity prices and value-added tax.
The November forecasts envisaged inflation falling to a modal 1.45 percent in the fourth quarter of 2012 based on market rate expectations, and 1.59 percent based on unchanged policy.
"For the first time in a while, assessing what happens to monetary policy will depend on both fan charts," Clarke said.
GROWTH RISKS
The BoE's outlook for growth will also play a key role in determining when policymakers start to withdraw monetary stimulus, and so far it has maintained there is enough slack in the economy to keep inflation in check further down the line.
The central bank will almost certainly have to revise down its near-term forecasts for GDP from November because of the shock 0.5 percent quarter-on-quarter decline in economic output in the final three months of 2010.
The contraction was mainly due to heavy snowfall in December, and there are signs that activity rebounded quickly in January.
But the BoE may still have to lower its medium term outlook for growth, lessening the urgency for the Monetary Policy Committee to take action on inflation.
The Bank's modal projection for year-on-year GDP growth in Q4 2010 was 3.05 percent -- almost double a first official estimate of 1.7 percent growth.
"That said, most MPC members have clearly become more worried about the damage to credibility that is being wrought by the persistent overshooting of the inflation target," said Simon Hayes, economist at Barclays Capital.
"In that case, the report will provide a vehicle to prepare financial markets, firms and households for a rate hike, probably within the next few months." (Reporting by Fiona Shaikh; Editing by Toby Chopra)