There are a lot of unanswered questions in my mind. Where were the parents during the visit? Do they agree with your desire to have authority over the child? Will they be there for this visit? Will there be fallout over your decision? And finally, was the scenario - a 7-year-old sharing toys with a 2-year-old - necessary? (I would think a lot of the 7-year-old's toys were not interesting or relevant to the 2-year-old.)
Without the answers to the above questions, I'll venture to answer your question.
I believe it is very important if you are in a position of authority to avoid making empty threats. Empty threats undermine authority greatly. My children knew that whatever consequence I warned them would result from continued bad behavior was going to happen 100% of the time. This made them consider their actions carefully.
It also, however, placed a heavy burden on me to be careful and considerate with my words, to look for alternative ways, if possible, to deal with their bad behaviors, and to make the punishment fit the crime (to be a natural consequence of the bad behavior, or to make it commensurate with the behavior.)
For this reason, I would leave the bouncy castle out of play for the entire visit, including to your own 2-year-old. Surely a 2-year-old can be distracted from a bouncy castle for a few days.
As to two wrongs not making a right, this is where wisdom comes in before you issue an ultimatum. What's done is done. If you really believe you were wrong and should not have issued that threat, then apologies are in order. If you don't believe you were wrong, then no bouncy castle.
Your daughter will not only witness his consequential bad behavior, but might also be old enough to understand that you did not fulfill a promise you made in defending her against his bad behavior. Depends where exactly she is in her third year of life.
This is your house and your daughter. You have to weigh the whole of the situation in your decision. One thing I will say, though, is that 7 years of age is not too early for a consequence three weeks (or more) into the future.
Edited to add: In response to a comment (why bother if the parents don't agree?), I would say that in your home, you set the (reasonable) rules, and the guests (reasonably) comply. That's how it works in healthy relationships. In dysfunctional relationships, there are usually issues with boundaries, namely that people don't understand them or don't respect them. It doesn't mean that the errant children will not learn something valuable.*
A reasonable boundary is "In my home, we share toys - where appropriate - even with 2-year-olds." A reasonable counter-boundary is "You do not have the authority to discipline our child in our presence." Those need to be worked out; if the parents don't enforce your wishes themselves, something uncomfortable needs to be done (e.g. you remove yourselves from the situation, or you have a confrontation).
*One year, my family and my brother-in-law's family decided to take a one-week vacation to Disneyworld together because we had children very close in age, and they got along very well. However, on the first day, my children were constantly being corrected for behavior that was not inappropriate (the in-laws kids were all quiet, submissive girls; I had rowdy, loudish children.) For example, they were told to be quiet in public places when they weren't being loud, etc. My kids were constantly being told what not to do, and my kids (and I) were frustrated. On the second day, they were peering at something through a fence. The brother-in-law yelled, "Get away from that fence!" There was absolutely no reason for them not to look through the fence; the fence was there to prevent people from entering a pond. I said to my BIL, "J---, please don't correct our children when we are right here. If you're concerned, please tell us, and we'll deal with it however we think best." His response was, "That's ridiculous! If I can't discipline your kids at all times, we can't go on vacation together!" My response was, "Your choice. Let us know what you decide." We parted ways to another part of the park. After about 36 hours apart, my BIL apologized and agreed to respect my boundary. The rest of the vacation was much more relaxing, and a really fun vacation that we all remember fondly, as were subsequent vacations together.