By David Milliken and Matt Falloon

LONDON (Reuters) - Inflation will be below the 2 percent target in two years, the Bank of England forecast on Wednesday, and Governor Mervyn King said the central bank was open-minded about pumping more new money into the economy.

In its quarterly Inflation Report published a week after the central bank raised its asset-buying, or quantitative easing, programme by another 25 billion pounds to 200 billion, the BoE said it expected the economy to return to growth at the start of the year.

Last week, many analysts had decided the BoE would not add any more to the QE total but Governor Mervyn King said the Monetary Policy Committee had not yet made up its mind.

"It certainly would be wrong to conclude we've decided that. We've made no judgement at all, we've a completely open mind whether to do more asset purchases or not. What we did last week was not a first step towards anything," King said.

Bond markets rallied and sterling fell after the bank's new quarterly forecasts which were more dovish than expected and suggested that any move up from record low interest rates would be some time off.

"In short, it's too soon to rule out further monetary policy action. At the very least, any tightening looks a long way off," said Jonathan Loynes, chief European economist at Capital Economics.

Nonetheless, the new forecasts were more upbeat on the economy than the last set in August though they do not incorporate the fiscal tightening that will likely in place if the opposition Conservative Party win the election next year as expected.

The charts in the Inflation Report show growth returning at the beginning of 2010, similar to August's forecasts, but then increasing slightly more rapidly than previously forecast to around 3.75 percent at the end of 2011.