Bank of England governor Mervyn King said the UK economy has "only just started" along the road to recovery.
In a gloomy forecast, the governor said repairing the damage of the recession would not be achieved "in a few quarters" after an "extremely painful" year for most economies around the world.
The Bank's quarterly inflation report said the strength of the recovery was highly uncertain and forecast that "bank lending will probably remain weak over the next three years".
The predictions come after a shock 0.4% fall in output between July and September, which the bank said was "significantly weaker" than expected at the time of its August forecast.
Although the bank said the outlook for inflation was "unusually uncertain", its forecasts also signalled that more help for the economy may be needed to underpin the recovery. Based on the City's expectations for interest rates and a £200 billion boost to the money supply from quantitative easing, it predicts that inflation will be below its 2% target in two years' time.
This suggests that interest rates could stay at the current record low of 0.5% for longer than expected - with more QE also an option. The bank also predicted a bigger-than expected spike in inflation to "well above target" at about 3% early next year due to factors such as the end of the temporary cut in VAT in January.
But the bank also highlighted the long-term damage to the public finances by the record Government borrowing undertaken to tackle the slump. It said that much of the deterioration in public finances reflected factors that were likely to be more persistent, such as lower tax revenues from areas including financial services.
The governor added: "The need for a credible plan to ensure a substantial reduction in the fiscal deficit is now clear to everyone."
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