Growth is grinding to a halt and GDP will only rise 1% in 2012, according to the Bank's latest forecast

The Bank of England has warned the economy is grinding to a halt and has slashed its growth forecast for the coming year, leaving the door open for it to pump more electronic money into the economy.

The Bank indicated that growth could stagnate until the middle of 2012 and would only reach 1% for the year as a whole – half its previous forecast – as Britain battles pressure from the eurozone debt crisis.

The Bank also cut its inflation forecasts and predicted inflation would fall below the government-set target of 2% by the end of next year, paving the way for it to widen its quantitative easing (QE) programme, which involves the Bank buying up assets in the financial markets and thereby putting more cash into the economy.

Governor Mervyn King painted a gloomy outlook for the UK and said it would face a tough fight to address the problems in the eurozone and further afield. "The underlying global problems of trade imbalances, unsustainable levels of external and internal indebtedness and loss of competitiveness remain. Sovereign and bank funding concerns are symptoms of these underlying problems," he said.

"The journey to a more balanced world economy will be long and arduous. The immediate impact of the decline in sentiment is that the outlook for growth of the world economy has worsened since August. That is also true here in the United Kingdom, where activity could be broadly flat until around the middle of next year. We continue to face a difficult economic environment."

Economists said the report bolstered market expectations that the Bank would expand its QE programme by at least £50bn in the new year from £275bn now.

"As expected, the monetary policy committee has had to pull its GDP growth forecasts down sharply … Indeed, its forecasts for the level of GDP show that it expects the economy to stagnate for much of next year," said Vicky Redwood, chief UK economist at Capital Economics.

"Accordingly, the report both endorses market expectations that rates will stay on hold for the foreseeable future and suggests that more policy loosening will yet be needed. What's more, even the MPC's downgraded growth forecasts still look optimistic to us – we expect zero growth next year. We had pencilled in another £75bn of QE in February, but if the economic news over the next couple of weeks remains weak, the MPC might feel compelled to announce extra support as soon as next month."

The Bank sees some recovery in 2013, with growth pencilled in at around 2.5%, down from the 3% previously predicted. Overall the "prospects for the UK economy have worsened", the report said.

The Bank's 1% forecast for growth in 2012 is well below the 2.5% predicted by the Office for Budget Responsibility, the independent body responsible for the government's economic forecasts. The OBR is widely expected to cut that forecast when it publishes its latest set of predictions on 29 November.

That follows a swathe of gloomy consumer and business surveys that indicate companies and households are reining in spending as they fret about economic prospects at home and abroad. The latest official data on unemployment has also painted a grim picture of the squeeze on UK households. Youth unemployment has pushed through 1 million to a record high while overall, unemployment is at its highest for 17 years. For those still in work, life is getting more expensive with wage growth at 1.7% dwarfed by 5% inflation.

King said he sympathised with the people he met on his visits around the UK who were suffering as they tried to keep their businesses going and to stay afloat despite the squeeze on incomes.

"These people were not responsible for the crisis and they are suffering enormously as a result of it," he said. "I have enormous sympathy."