Households should prepare themselves for slower growth, tighter credit conditions and stickier than expected inflation, Bank of England governor Mervyn King has warned.
The Bank's latest forecast shows the effects of Chancellor George Osborne's emergency Budget, with slower than predicted growth and the January VAT rise sticking inflation above the Bank's 2% target.
Mortgages, credit cards and loans will continue to prove elusive to many as banks try to repair their balance sheets, the report added.
Mr King said problems with the banking sector are "likely to mean a choppy recovery". The forecast added that families' disposable incomes would continue to be squeezed and some companies could face lower public-sector demand.
The gloomy report comes after recent surveys showed a sharp slowdown in high street sales, falling house prices and consumer confidence at its lowest for more than a year.
Households have also become more pessimistic recently, dogged by fears of unemployment and low wage rises, the report added.
Although the Bank's monetary policy committee has already slashed interest rates to a record low of 0.5% and pumped £200 billion into the money supply, the latest inflation forecasts could mean further action is on the cards.
