The Bank of England has lowered its UK growth forecast and said the economy will remain flat for the rest of the year.
The new assessment comes after bank governor Sir Mervyn King dropped the forecast from 0.8% three months ago and 2% a year ago.
He said: "The overall outlook for growth is weaker than the outlook in May."
Looking ahead, the bank also sharply cut its forecast for medium-term growth from 2.8% to 2.1%, citing worries that factors hurting growth since the financial crisis may be more long-lasting than first thought.
"Our efforts to bring about a rebalancing of the UK economy will require patience," he said.
The consumer prices index has continued to fall in 2012 and forecast to drop further.
The inflation dip is expected to ease upward pressure on the cost of living, which has seen workers struggle with wage stagnation.
Sir Mervyn said the underlying picture of economic output has been at best "broadly flat" over the past two years and has "continually disappointed" recovery expectations.
He said productivity growth has been "unusually low" and that "the economy will continue to face headwinds".
Sir Mervyn said that domestic deficit-cutting, tight credit conditions and the eurozone crisis were making it difficult for the economy to recover from recession.
Asked about the effectiveness of the recently implemented Funding For Lending stimulus package, Sir Mervyn said UK banks needed to improve their loan programmes.
He said: "Put bluntly, if they want to get cheap funding from us, they have to lend more."
:: On the foreign currency markets, sterling rose to session highs after Sir Mervyn said cutting interest rates would damage financial institutions and would be partly counterproductive.
More From Sky News