“I reappointed him, and he disappointed me.” A decade and a half ago, that was the peevish verdict of George Bush Sr, the former US President, on his decision to reinstall Alan Greenspan at the helm of the Federal Reserve in 1991, in the midst of the recession of the early Nineties.

After his ignominious ejection from the White House in January 1993 by disaffected American voters, President Bush Sr pinned much of the blame on Dr Greenspan’s failure to deliver more aggressive cuts in US interest rates that might have staved off the worst of that economic slump.

If a fretful Gordon Brown was watching on Wednesday as the Bank of England unveiled its latest strategy for the British economy, the Prime Minister may well have wondered whether he might end up feeling much the same way over his decision last month to hand Mervyn King a second term as Governor of the Bank.

Mr King’s flinty and uncompromising message on Britain’s economic prospects was bleak enough to leave any occupant of No 10 wringing his hands over the likely evaporation of the country’s “feelgood factor”.

For an embattled Mr Brown, contemplating a countdown to the next election now apparently set to be blighted by economic misery, the Governor’s message must have come close to inducing apoplexy.

Mr King himself could be forgiven for privately savouring the thought of a brooding Prime Minister’s knitted brows. Having been left for months in an uncomfortable limbo as Mr Brown made up his mind over whether he should be allowed to stay on at the Bank, the Governor might be entitled to a little Schadenfreude.

For the rest of us, there was little cheer in the Governor’s grim prognosis. Despite his entreaties against “lurid headlines of doom and gloom”, Mr King left little doubt that the Bank sees a torrid time ahead for the economy. Battered by the world downturn, a tightening of lending conditions for households and businesses and a severe toll on consumer demand from soaring food and energy bills, as well as a sliding housing market, Britain’s growth is set to slow sharply during the next 12 months. The Bank’s central view is that annual growth in GDP will reach a nadir of 1.7 per cent by the summer.

This downswing may be severe enough to take the economy to the brink of a technical recession, the Governor conceded. He admitted, too, that the squeeze on household spending power from the surging cost of food and fuel spelt a “genuine reduction in our standard of living”.

Confronted by this dismal forecast, the Prime Minister must surely have been praying that Mr King would pledge that the Bank would ride to the rescue with steep cuts in interest rates. Yet Mr Brown’s distress must have morphed swiftly to despair as the Governor made clear that he envisaged a rather different reaction.

For Mr King and the Monetary Policy Committee (MPC), the dilemma is that, even as steep rises in food and energy prices sap consumer demand, they are also set to combine with the dearer import bills — triggered by a sharp fall in the pound — to drive inflation sharply upwards.

The consequence is that, on the Bank’s forecasts, consumer price inflation would soar from 2.2 per cent now to 3 per cent or more by autumn, were the MPC to fulfil financial markets’ bets and cut base rates to 4.5 per cent by early next year (from 5.25 per cent now).

Even with more modest base rate cuts, the Governor made plain that at some point this year it was still “odds-on” that inflation would reach the 3.1 per cent level that would force him to pen another explanatory letter to the Chancellor.

The Bank is, then, caught between a rock and a hard place, facing what Mr King calls a “difficult balancing act”, as it strives to shore up growth and prevent inflationary pressures becoming entrenched.

As the Governor emphasised, the MPC accepts that there is little that it can do in the short term about an inevitable spike in prices this year, because it takes 18 months or more for any changes in interest rates to feed through fully.

Yet the Bank’s real — and quite proper — fear is that unless it acts as tough as the Governor talked last week, then the big price increases now being felt will lead individuals and businesses to come to expect higher inflation in the future.

In turn, that could lead workers to make steeper wage demands and companies to attempt to bolster margins, making those expected inflationary pressures a self-fulfilling prophecy.

The clear implication, then, is that the Bank will be slower and more cautious in delivering cuts in borrowing costs than the markets expect and than Mr Brown would hope. Yet while Mr King and the MPC are understandably likely to maintain this “tough love” message for much of this year, ultimately it is probable that base rates will fall farther than the Governor implied last week — farther, even, than is implied by the aggressive rate cuts anticipated by the markets.

While this may come as a tiny grain of comfort for a fretting Prime Minister, any consolation will be scant, for the chief reason to expect such an outcome is that the MPC is probably still too optimistic over the outlook for growth. Indeed, the large “downside risks” included in its forecasts implicitly acknowledge this threat.

The Bank is probably also too pessimistic over inflation.

As Paul Dales, of Capital Economics, notes, last week’s forecasts combined the MPC’s weakest growth forecast for five years with the highest projected levels of inflation since its target was switched to the consumer price index in 2003. That looks like an odd combination.

Eventually, however, it is likely that, as a still-weaker outcome for growth emerges this year, the worst of the present inflationary dangers will subside and rates will tumble towards 4 per cent in a year’s time. In the meantime, though, Mr Brown will be left to dread that the Government’s poll ratings will suffer a similar fate.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive