By Olesya Dmitracova
LONDON (Reuters) - The Bank of England stopped short of announcing further stimulus for Britain's fragile economy on Thursday, but is widely expected to do so in February as the economy may have shrunk at the end of last year.
Britain is at risk of recession as global growth slows, government spending cuts bite and all-important consumers struggle with high inflation, tax hikes and slow wage rises.
And with the government's hands tied by its pledge to erase the country's large budget deficit in order to defend its top credit rating, the onus is all on the central bank.
British industrial output, which accounts for around 15 percent of the economy, posted a surprise fall in November, data showed earlier on Thursday. According to some economists, that added to signs of an economic contraction in the final quarter of 2011.
However, Britain's National Institute of Economic and Social Research estimated that the economy still grew in the period, albeit very slightly.
The finance ministry gave a cautious welcome to the estimate, saying in a statement: "We should be realistic about the risks; the uncertainty in the euro area continues to have a chilling effect on the UK as well as elsewhere."
Either way, analysts see a strong case for the BoE to expand its 275 billion pound asset-buying quantitative easing (QE) program, aimed at boosting growth.
"Overall 50 billion pounds more QE next month seems to us to be virtually 'baked in the cake'," said Investec economist Philip Shaw. "Steep declines in inflation should facilitate a further 50 billion pounds of asset purchases in May, taking the QE target to 375 billion pounds."
The BoE also kept interest rates at a record-low 0.5 percent, where they have been for nearly three years.
All but one of the economists polled by Reuters had forecast the central bank would keep the target for its asset purchases unchanged, after raising it by 75 billion pounds in October.
Instead, economists expected it to unveil an extra 50 billion pound injection next month. BoE policymakers have been warning about the risk of an economic contraction and even recession in Britain, amplified by a debt crisis in its main trading partner, the euro zone.
The region's central bank also held its main interest rate at 1.0 percent on Thursday.
Recent mixed economic news in Britain had bolstered the view that the BoE might want to wait until February before deciding on more QE. By then the current round of asset purchases will be concluded and the bank will have its latest growth and inflation estimates.
A profit warning from Tesco
Some of Tesco's limp performance was due to its "Big Price Drop" campaign in September, said chief executive Phil Clarke, adding that the group would cut more prices in coming months.
The news lends support to forecasts by the BoE that inflation - still just off a recent three-year high above 5 percent - will tumble early this year and dip below its 2 percent target towards the end of 2012, as economic weakness weighs on prices and one-off effects such as a 2011 sale tax increase disappear.
(Additional reporting by David Milliken, Fiona Shaikh and Sven Egenter; editing by Anna Willard)