Sir Mervyn King has downgraded Bank of England's growth forecast and warned the economy will be below pre-financial crisis levels for the next three years as it continues its recent "zig-zag'' pattern.
"We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while," he said at a press conference after the publication of the central bank's latest quarterly Inflation Report .
The Bank of England expects GDP growth of just 1pc next year and forecast that inflation would to fall back towards the Government's 2pc target in the second half of 2013, later than previously thought.
“There seems a greater risk that the UK economy may be in a period of persistent low growth,” Sir Mervyn said.
Growth in the third quarter was boosted by one-off events such as the Queen's Diamond Jubilee and the Olympics and he cautioned that economic output may shrink again in the final quarter of this year.
“The weaker gross domestic product profile reflects the judgment that the broader causes and repercussions of the financial crisis may bear down more forcefully on demand and productivity than assumed” previously," the Bank said.
This chart from the inflation report shows that the probability of a strong economic recovery in Britain has waned.
Sir Mervyn expects the recovery will be “sustained" but gradual in the face of a slowing world economy.
"We face a difficult challenge in our biggest export market, the euro area plus the countries around it account for one half of our trade.
"The prospects there look pretty bleak. This is a very difficult environment in which the UK economy is trying to rebalance."
The UK economy emerged from the longest double-dip recession since the 1950s between July and September with 1pc growth.
Sir Mervyn said the outlook for inflation was the main reason why the policymakers decided to stop the purchases of gilts - or quantitative easing - in November.
The report showed that inflation was likely to be significantly higher over the next 18 months than expected in August, posing a barrier to further policy stimulus.
UK inflation jumped to a surprise five-month high of 2.7pc in October as higher university tuition fees and food costs pushed up the cost of living for British households. Energy price rises over the next few months are likely to drive it higher.
The Governor said there were limits to what monetary policy could do to boost an economy undergoing far-reaching adjustments after the financial crisis amid severe headwinds from the eurozone debt crisis.
"But the (Monetary Policy) Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases," he said.
Vicky Redwood, chief UK economist at Capital Economics, thought the Governor had left the door open to more quantitative easing.
"King’s comments make us a bit more comfortable with our forecast that the Committee will resume its asset purchases before long," she said.
"Note that the Committee paused in May, only to resume its asset purchases just two months later. We still expect £50bn more gilt purchases in February, possibly accompanied by an interest rate cut."