Andrew Bailey has warned Liz Truss not to challenge the Bank of England’s governing powers and change its mandate as tensions between Threadneedle Street and ministers continue to rise.
In a letter to the Treasury committee, the governor of the Bank of England said curbing the institution’s independence could damage its international reputation.
Mr Bailey also signaled his opposition to a proposal that would allow ministers to reverse any decisions made by City regulators if they are seen to hold back post-Brexit reforms.
He said: “Regulatory independence is important, not least because our international standing, and therefore the competitiveness of the UK financial sector which the reforms aim to improve, depends on it.
“Anything that weakens the independence of regulators undermines the goals of the reforms.”
Mrs Truss, who is the firm favorite to replace Boris Johnson as Prime Minister next month, has vowed to press ahead with the introduction of a so-called “call-out” power that would allow the Government to overturn regulators’ decisions.
She has also pledged to review the Threadneedle Street mandate if she becomes prime minister and has questioned the Bank’s use of quantitative easing.
The “call-in” power was first proposed by Rishi Sunak, the former chancellor, but was left out of an initial draft of the new Financial Markets and Services Bill that was published last month .
Both Ms. Truss and Mr. Sunak have argued that the introduction of a ‘call’ power is necessary to ensure that politicians are ultimately responsible for major regulatory changes, rather than ‘faceless regulators’.
One area where the new “power to call” could be invoked is around a review of the controversial Solvency 2 rulebook in the insurance sector, which ministers fear will be held up by resistance from the Authority Prudential Regulation (PRA) of the Bank.
The latest clash between Bailey and Truss, which would have previously been highly unusual, follows months of growing tensions between the Government and the Bank over who is to blame for the cost of living crisis as inflation spirals out of control.
In the letter, Bailey welcomed the other reforms in the Financial Markets and Services Bill, which includes a new secondary objective for financial regulators to promote the growth and competitiveness of the UK economy.
The bill’s measures “are intended to establish a strong, responsive and internationally respected approach to financial services regulation for the UK,” Bailey said.