The Bank of England has warned there was now a one-in-three chance of the economy shrinking at the start of next year as Brexit uncertainty takes its toll.
The growth forecast has been downgraded for 2019 and 2020 to 1.3%, but raised the outlook for 2021 to 2.3%.
Interest rates have held firm at 0.75%, as members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged.
In a warning shot, it also predicted a 33% chance that annual growth will be below zero in the first quarter of 2020, even without a cliff-edge EU withdrawal.
Speaking at a press conference, governor Mark Carney said: "Profound uncertainties over the future of the global trading system and the form that Brexit will take are weighing on UK economic performance.
"Until they are resolved, shifting perceptions of these factors will drive volatility in market interest rates, equity prices and currencies values.
"Monetary policy cannot offset the real effects of these fundamental determinants of jobs, growth and prosperity.
"But monetary policy can help smooth the adjustment of the economy to these shocks."
Mr Carney said the Bank will "take all appropriate measures" to support jobs and growth, but he said there were "limits" to what it could do and warned over the impact of a hard Brexit.
The governor added there would be an "instantaneous shock" on the economy of a no deal.
"It will take some time for this economy... to adjust its supply capacity, which is oriented in export terms largely to Europe to other economies," Mr Carney said.
Asked by ITV News Business and Economics editor Joel Hills how likely a no-deal Brexit was, Mr Carney said: "The financial policy committee of the Bank of England has assumed the possibility of no-deal since the day after the referendum, which is why we have been preparing, the financial sector, to be ready for no-deal.
"The core of the financial sector is ready for no-deal...preparing for a contingency.
"A contingency is different to what's most likely, and all I can do is quote the prime minister, speaking earlier this week when he said, 'we are not aiming for no-deal, we don't think that's where we'll end up'."
Chancellor Sajid Javid's funding announcement includes £1.1 billion for departments and the devolved administrations to spend immediately, with a further £1 billion in reserve.
The pledge for extra Brexit funding, brings the total amount of money set aside to prepare for Brexit to £6.3 billion, after former chancellor Philip Hammond allocated £4.2 billion since 2016.
Mr Javid said the extra money will ensure the UK is ready to leave the European Union “deal or no-deal”.
The MPC cautioned that in the event of a no-deal Brexit, “the sterling exchange rate would probably fall, CPI inflation would rise and GDP growth slow”.
It reiterated that rates could go in either direction as it would need to balance the need to cool inflation caused by the plunging pound, while also providing support for a flagging economy.
The pound has already tumbled by 6% since the Bank’s last inflation report in May as no-deal fears mount.
UK growth is also being hit hard as businesses hold back on investment due to Brexit uncertainty, which is coming at a time of slowing global economic conditions amid trade tensions between the US and China.
The Bank confirmed it now expects UK gross domestic product (GDP) to flatline in the second quarter, down from 0.5% growth between January and March.
The Bank upped its UK growth outlook to 2.1% in 2021, though it admitted its forecasts were heavily skewed by financial markets now pencilling in a rate cut to 0.5% in the first half of 2020 as they see a 50/50 chance of a no-deal Brexit.
Forecasts are based on a smooth Brexit deal, which looks increasingly likley as new Prime Minister Boris Johnson takes a hardline stance in negotiations with the EU ahead of the October 31 deadline.
The Bank's inflation report showed the toll being taken on UK businesses, with recent surveys showing that firms expect investment to remain weak for the next year even if a Brexit deal is reached.
But consumer confidence and spending has remained “resilient”, while house prices have not been as weak as expected recently, according to the Bank.