LONDON: The Bank of England may still have to pump more money into Britain's fragile economy, Gov. Mervyn King said on Wednesday, after the central bank forecast inflation standing well below target in two years' time.

Sterling fell while gilts and interest rate futures rallied, as the BoE's gloomy economic outlook boosted expectations that monetary policy will need to stay very loose for the rest of the year and left the door open for further easing.

In its February Inflation Report, the central bank saw consumer price inflation at around 1.2 percent at the start of 2012, assuming market interest rates started to rise in the third quarter of this year.

The BoE, which froze rather than ended its 200 billion-pound asset purchase scheme last week, also said inflation would be below target in two years' time even if rates did not rise at all from their current record low of 0.5 percent.

"It is far too soon to conclude that no more purchases will be needed," King told reporters.

"So the Committee will keep its options open, and further purchases will be made if they prove necessary to keep inflation on track to meet the target in the medium term." Faced with the worst recession in decades and having slashed rates to 0.5 percent, the central bank embarked on an unprecedented policy of quantitative easing last March - buying up assets, mostly gilts, with newly-created cash to boost demand.

The BoE expanded an initial 75 billion-pound scheme to 200 billion pounds over 2009 and spent the last tranche earlier this year, choosing last Thursday to gauge the impact of its efforts after official data showed the economy returned to growth at the end of last year.

But with a large fiscal consolidation likely to follow this year's parliamentary election and continued strains in bank lending, the central bank warned big headwinds remained.

"The strength of the recovery is highly uncertain," the BoE said in its report.

The BoE report showed the economy recovering only very slowly, with output taking until around mid-2011 to return to pre-crisis levels. GDP growth is seen at a rate of around 3.5 percent in two years' time.

The BoE's projections are based on the Labour government plans, set out in its December pre-budget report, to halve a record budget deficit over four years.

But another budget is due in March and an election is expected on May 6. Most analysts say a more severe fiscal consolidation is likely to follow whoever wins that contest.

King said there was a political consensus over the need for a credible plan to eliminate Britain's deficit and dismissed talk that Britain was on the edge of losing its triple-A credit rating.

"The clear message is that further policy support may yet be needed," said Jonathan Loynes, an economist at Capital Economics.

"Either way, any tightening of monetary policy - conventional or unconventional - is a long way off."