The Bank of England has prepared the country for weaker growth amid rocketing energy bills and tough Government cuts that are squeezing household spending.
In its quarterly inflation report, the Bank reduced growth forecasts over the next two years and said inflation will fall back later than expected in 2013.
Officials said energy bills could climb by up to 15% this year, which is well ahead of previous expectations, dampening growth and putting pressure on living costs.
Economists said that despite the uncertainty, the report suggested interest rates will increase from 0.5% to 1% by the end of 2011.
Bank governor Mervyn King revealed that the soft patch in growth will only be temporary but the recovery will be reliant on business investment and exports. He also said the pressures on household budgets may increase further.
It is the fourth time the Bank has downgraded its growth forecast in the year since the coalition Government was formed.
The report reopened the debate over the severity of Chancellor George Osborne’s austerity measures and the ability of the economy to withstand the cuts.
Shadow Treasury chief secretary Angela Eagle said: “Cutting too deep and too fast, as this Conservative-led Government is doing, is a vicious circle.
The Bank downgraded its expectations for gross domestic product in 2011 to around 1.7%, from about 2% in its February report. In 2012, GDP is expected to be around 2.2%, from just under 3%.
The rate of inflation, currently at 4%, is now expected to hit 5% this year and remain above the Government’s 2% target throughout 2012 before falling back - but only if interest rates rise in line with market expectations from the third quarter of 2011.
The gloomier outlook reflected the impact of surging energy prices - such as crude oil in the wake of political unrest in Libya - and the impact disappointing real wages will have on spending.