Sterling plunged against the euro and the dollar on Wednesday as the Bank of England gave its bleakest economic assessment for more than a decade and financial markets priced in a series of interest rate cuts.

Mervyn King, the Bank of England governor, said the British economy required a “painful” adjustment to higher energy and food prices, predicting the economy would grind to a halt for a year before recovering, probably to a slower growth path than before. There was “bound to be a quarter or two” of economic contraction, he said. Official figures on Wednesday showed unemployment rose by 60,000 in the second quarter, a jump from the 13,000 recorded in the first quarter.