Sir Mervyn King, Governor of the Bank, also said inflation, currently at 3.5%, will stay above the government’s 2% target for longer than expected, meaning living costs will remain high.
With so much speculation about what will happen if Greece does exit the euro, and with the eurozone crisis deepening due huge Spanish and Italian bank debts, it’s little wonder that savers, investors and European property owners are so worried.
Here, we take a look at how the crisis affects us…
What if I have savings with a Spanish-owned bank?
If your savings are held here with a UK arm of a Spanish bank, then any deposits up to £85,000 will be fully protected by the Financial Services Compensation Scheme (FSCS). That means anyone who has savings with Santander, which is UK-regulated, will be covered by the FSCS up to that amount.
While Santander was one of 16 institutions downgraded by ratings agency Moody’s on Thursday, the bank is keen to point out that its UK arm is completely separate from its Spanish parent.
A spokesman for Santander said: “Santander operates under a subsidiary model. This means that Santander UK plc is completely autonomous from its Spanish parent company. This structure acts as a firewall to prevent problems within one part of the group spreading to other units in the event of financial difficulties.
“Santander also operates a ‘firewall’ approach to borrowing and lending in the markets in which it operates. This means money raised in the UK stays in the UK.”
However, bear in mind that not all foreign-owned banks are regulated in the UK if they operate here. Some of them, such as Dutch banks ING Direct and Triodos, belong to the ‘passport scheme’, which means if they fail, you'd have to claim money back from the bank’s home country’s compensation scheme.
Find out more about the protection you have on your savings in our article ‘Who owns who’.
What if I am heading to Europe?
Holidaymakers going to Europe in the next few months are among those who actually stand to benefit from the weak euro. The pound has been hovering near a three-and-a-half year high against the single currency, with several bureau de change selling euros at rates as high as 1.23 to the pound.
Currency provider ICE.com said online orders for the euro have increased 275% on average, year on year. Tom Johnson, spokesman for ICE.com said: “There’s a lot of uncertainty and volatility in currency exchange markets. No one can accurately predict what will happen with the pound and euro in the next few weeks. But, from our data, it certainly seems that many British travellers have been stocking up on euros now for their summer trips.”
With an average purchase of 800 euros, travellers could have almost 10% more to spend than this time last year, putting as much as £60 back into the pockets of holidaymakers heading to the eurozone.
However, many experts expect the pound to strengthen further as the crisis deepens. Alex Lawson, senior broker at the foreign exchange specialists Moneycorp, said: “The single currency is still looking fragile - and could easily fall further.
"A smart strategy would be to buy some of your holiday euros now, and buy the rest closer to your departure. That way you'll get some at a good rate - and may get the rest at a brilliant rate."
What if I have a mortgage in euros?
Anyone with an overseas property mortgage or other debts in euros will also be benefiting from the weakness in the single currency. However, they will also have seen the price of their property drop dramatically, with any future falls in the euro likely to devalue their holiday homes further.
People who own property abroad which they need to sell and who don’t want to lose out if the euro falls further can lock into today’s exchange rate with a ‘forward contract’. Most foreign exchange specialists allow you to do this for a couple of years or even longer.
If Greece defaults, then interest rates are likely to soar, raising the cost of euro mortgages. The euro Interbank Offered Rate, known as Euribor - which tracks the rate at which major European banks will lend to each other - has fallen by more than half since late last year, but some experts claim that any further falls are looking unlikely as the crisis escalates.
What about pensions and investments?
Markets have been rocked by the crisis in the eurozone, with billions of pounds wiped off the value of shares in the past week alone.
However, selling your stock holdings or share-based investments now means you will only crystallise any losses. While it may be extremely worrying to see the value of your funds fall, many experts are recommending that people try to weather the current storms and take a long term view rather than panic-selling.
Paul Brain, manager of the Newton Global Dynamic Bond Fund, said: “As we enter another round of anxiety regarding the eurozone, should we be more concerned this time? In some respects, the answer is ‘yes’, as the economic situation seems to have worsened, and is now even affecting the core Northern European economies.
“On the other hand, the European Central Bank (ECB) has adapted to address the new developments, and is more willing to provide the liquidity required to keep the financial system going."
A sensible strategy at any time, but particularly during difficult times, is to make sure you regularly review your portfolio to ensure you are not over-exposed to any particular sector, and to be prepared for a bumpy ride ahead.
There is little good news for those with pensions either, as the value of their savings pots is likely to have reduced significantly in recent weeks. This means that those approaching retirement are likely to have less money available to purchase an annuity, with a potential reduction in retirement income for the rest of their lives as a result.
Annuity rates being offered by insurance companies are also affected by the crisis as the bedrock of annuities are government stocks, or gilts. Investors concerned about the falls in global equities are flocking to buy safer investments such as gilts, which means the yields they offer dropping are a result. This in turn has an adverse effect on annuity rates.
To put this in perspective, the annual income a 65-year-old man could get in return for a £100,000 pension pot has dropped from nearly £6,800 a year four years ago to less than £5,200 today.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.