There may be no cuts in interest rates until 2010, the Bank of England has indicated.

However, inflation is predicted to rise far above previous forecasts and stay well above the Government's target of two per cent for up to two years.

Mervyn King, the Bank governor, said price increases would cause "a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply".

Saying that "the nice decade is behind us", he added that it was "quite possible we may get the odd quarter or two of negative growth".

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Presenting the UK quarterly forecasts, the Bank said inflation could reach 3.7 per cent by the end of the year.

According to the Financial Times, inflation projections will not return to the two per cent target until early 2010, suggesting that the Bank has no room for rate cuts until then - even though the UK economy will slow sharply.

Families face a five-pronged assault on their finances, Mr King said in his bleakest assessment yet of the state of the country.

And the governor predicted:

• Gas, electricity and food bills will get even more expensive this year and will push inflation towards 4 per cent, possibly even higher;

• Economic growth is likely to slump towards 1 per cent by the end of the year, and there is now a risk of recession;

• The housing market will continue to fall after worsening 'markedly', but it is impossible to say how far values will tumble;

• Pay rises may be curbed, further damaging employees' quality of life;

• And the banking crisis could continue to run well into 2009, keeping mortgage costs painfully high.

Mr King's verdict cast a pall over Gordon Brown's political fightback by setting out in grim detail the extent of the difficulties facing the country.

The prospect of soaring inflation and slumping growth will also cast doubt on the Prime Minister's belief that he can pilot the economy to safer waters and avoid a recession.

Mr King cautioned that there was little scope for the Bank to jump start the economy by lowering interest rates because inflation remained a major threat.

Ominously, he said the economy was rebalancing and the Bank should not try to "prevent that adjustment".

The governor described the problems facing the Bank as "its most difficult challenge yet" since it was given independence in 1997.

In recent weeks, he has called on the Bank of England to follow the Federal Reserve in the United States which has aggressively slashed the cost of borrowing in an effort to jumpstart the American economy.

Mr King said: "We are travelling along a bumpy road as the economy rebalances. Monetary policy shouldn't try to prevent that adjustment."

Jonathan Loynes, of City analysts Capital Economics, said: "The message would seem to be that the Bank's rate-setting committee expects to cut rates only once more at the most.

"Its inability or reluctance to cut rates further now increases the chances that the downturn in the economy will be both deep and prolonged."

The Bank yesterday forecast gas and electricity prices will rise by another 15 per cent this year, another devastating blow for those already struggling to pay average bills of more than £1,000.

This will help propel the Consumer Prices Index measure of inflation to around 3.8 per cent by the end of the year, with a real danger it could exceed 4 per cent.

This inflationary surge will have a major impact on families because it is unlikely pay increases will keep pace.

Chancellor Alistair Darling yesterday admitted he was worried about higher food and oil prices.

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