Andrew Bailey has warned Liz Truss not to challenge the Bank of England's rule making powers and change its mandate, as tensions between Threadneedle Street and ministers continue to escalate.
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.
He said: “Regulatory independence is important, not least because our international standing, and therefore the competitiveness of the UK financial sector which the reforms are aimed at enhancing, depends on it.
“Anything that would weaken the independence of regulators would undermine the aims of the reforms.”
Ms Truss, who is the firm favourite to replace Boris Johnson as prime minister next month, has vowed to press ahead with the introduction of a so-called “call-in” power that would allow the Government to override the decisions of regulators.
She has also pledged to review Threadneedle Street's mandate if she becomes prime minister and 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 Services and Markets Bill which was published last month.
Both Ms Truss and Mr Sunak have argued that the introduction of a “call-in” power is needed to ensure politicians are ultimately responsible for major regulatory changes, rather than “faceless regulators”.
One area where the new “call-in power” could be invoked is around an overhaul of the controversial Solvency 2 rulebook in the insurance industry, which ministers fear is being held up by resistance from the Bank’s Prudential Regulation Authority (PRA).
The latest clash between Mr Bailey and Ms Truss, which would once have been highly unusual, follows months of rising 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, Mr Bailey largely welcomed the other reforms in the Financial Services and Markets Bill, which includes a new secondary objective for financial regulators to promote the growth and competitiveness of the UK economy.
The measures in the Bill are “intended to establish a strong, responsive and internationally respected approach to financial services regulation for the UK”, Mr Bailey said.