Queen's jubilee could harm UK economy, Bank governor warns

Sir Mervyn King was asked about the impact of the Jubileebefore the House of Lords Economic Affairs Committee

Bank of England Governor Mervyn King said he did not know whether the Bank would need to launch a fresh round of quantitative easing. Photograph PA

Celebrations for the Queen's diamond jubilee could throw the British economy into reverse again, Sir Mervyn King warned on Tuesday.

The Bank of England governor said it was "quite possible" UK output would shrink over the next three months. He also signalled that the country still faced a long battle to get back to the kind of growth it enjoyed before the financial crisis.

King was asked about the impact of the jubilee as he appeared before the House of Lords Economic Affairs Committee.

The late May bank holiday has been moved to Monday 4 June, and the next day has also been designated a break to mark the event.

The governor said: "We do expect quite possibly a fall in output in the second quarter, followed by a rise in the third quarter, as we will lose an extra day's work – it doesn't necessarily follow that we will lose that whole day's output – because of the national bank holiday."

He also indicated that continuing pressure on banks to reduce their debt levels was partly responsible for inhibiting their scope to lend.

"Even though funding costs have come down in the first couple of months of this year, they're still higher than they were a couple of months ago because of what's going on in the euro area," he said.

King said he did not know whether the Bank would need to launch a fresh round of quantitative easing, or electronic money creation, to address problems.

Pressed on whether the economy would recover to pre-crisis levels of growth, the governor replied: "I would like to think that we can go back to the sort of economic growth rates we saw in the past. Those people who are struggling on low incomes would feel it rather a policy of despair to say that we can't achieve growth.

"I see no economic reason why we cannot, in the long run, go back to the sort of growth rates we had before. Once we come through this crisis we will able to get back to that sort of period again, but it will take some time."