Thu Mar 7, 2013 5:41am EST
* Reuters poll shows 40 pct chance of more QE at midday
* Dismal data, policy rhetoric suggest call could be closer
* BoE willing to look past inflation for sake of growth
* Some scepticism about what more QE will achieve
By Christina Fincher
LONDON, March 7 (Reuters) - The Bank of England will decide on Thursday whether to pump more money into Britain's economy as the government stuck to its guns that it would not turn back on its deficit-cutting pledge.
Ahead of the 1200 GMT announcement by the BoE, Prime Minister David Cameron said abandoning the austerity programme would be disastrous.
Cameron's comments underscored how the BoE's monetary policy remains the main tool to support growth, even as a senior member of the coalition government suggested it may be time to borrow more to invest in infrastructure projects.
In recent days, dismal data on bank lending and manufacturing has been accompanied by a softening of rhetoric from the central bank and a willingness to consider new and unconventional policy options to kickstart growth.
A Reuters poll of economists last week showed a 40 percent chance of the bank opting for more quantitative easing after this week's two-day policy meeting, and a 60 percent chance before the year is out.
Since that poll was conducted, several economists have changed their call, and money markets suggest that the probability is closer to 50 percent.
The rise in QE expectations has weighed on the pound, pushing it to a 2-1/2 year low against the dollar.
"It's a very close call," said Ross Walker, UK economist at RBS. "At the very least, you have to say that the BoE is very happy to sound dovish."
Those arguing against further stimulus already point to Britain's sticky inflation, which is currently at 2.7 percent and not expected to return to the 2 percent target until early 2016.
Britain's central bank has already bought 375 billion pounds of gilts, the equivalent of 26 percent of the economy, far more in relative terms than the Federal Reserve's bond-buying.
Despite the BoE's efforts, Britain's economy contracted at the end of last year, and scepticism is growing about what more of the same would achieve.
The British Chambers of Commerce downgraded its growth forecasts on Thursday and said fiscal policy, including measures to support business investment, would be more effective.
PUSHING ON A PIECE OF STRING?
BoE policymakers, however, believe that QE still has some mileage left; deputy governor Paul Tucker, who did not vote for more bond buying in February, said last week that "nobody on the committee thinks that QE has reached the end of the road".
In February, three of the bank's nine monetary policy committee members were convinced of the need for more QE.
They included Governor Mervyn King. The last time he was in the minority, in June, he got his way the following month.
King will be replaced in July by Bank of Canada Governor Mark Carney, who is expected to take a proactive approach to getting Britain's economy growing again.
The Financial Times reported late on Wednesday that the government could change the BoE's mandate to give it greater focus on boosting growth.
Analysts said the BoE was already adopting a flexible interpretation of its remit - to target inflation at 2 percent on a two-year horizon - so tweaks to the wording may make little difference in practice.
When asked about the FT report, a Treasury spokesman said: "The government sets its inflation remit at the budget every year and we won't comment beyond that."
Osborne said publicly in December that he would welcome a debate on the central bank's remit. Although he added that the bar to change would be high, some economists see a chance of minor adjustments to give the bank extra leeway over how long it allows inflation to overshoot target.
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