10/03/2014 13:25 GMT | Updated 10/03/2014 13:59 GMT

Mark Carney To Be Grilled On Scottish Independence, Interest Rates And Markets

Bank of England governor Mark Carney speaking at the House of Commons Treasury Select Committee at, Portcullis House.
PA/PA Archive
Bank of England governor Mark Carney speaking at the House of Commons Treasury Select Committee at, Portcullis House.

Bank of England governor Mark Carney will face a marathon grilling by MPs over Scottish independence, the future path of interest rates and allegations of foreign exchange rate-fixing.

Carney is set to appear tomorrow before the Treasury select committee just days after the Bank suspended an employee over compliance concerns following an internal probe in a marathon three-part session that will see him questioned over the abandonment of his flagship "forward guidance" policy on interest rates as well as Scottish independence.

His deputy Andrew Bailey has already admitted that claims linking the Bank to the burgeoning forex scandal - which regulators say threatens to match the seriousness of Libor rate-rigging - could prove "enormously damaging".

The Bank was dragged into the forex affair - which is being investigated by the Financial Conduct Authority (FCA) - after a Bloomberg report centring on a meeting between officials and bank traders in 2012.

It was claimed that at the meeting, the traders admitted to the practice of sharing information about customer orders before currency benchmarks are set - an alleged practice at the heart of an ongoing regulatory probe into market manipulation.

They were said to have been told that there was no policy on these communications and that banks should make their own rules.

Bailey stressed during an appearance before MPs last month that the Bank did not condone any market manipulation and that it took the claims "very seriously".

Last week, it said it had found no evidence that its staff had been involved in forex manipulation, but revealed it had suspended a member of staff while it investigated compliance with internal control processes.

The Bank's internal review has so far covered around 15,000 emails, 21,000 Bloomberg and Reuters chat room records and more than 40 hours of telephone call recordings.

Regulators worldwide - including the FCA in Britain - are investigating a number of firms and their foreign exchange trading activities as part of a major probe of the £3 trillion a day forex market.

They are looking into whether currency traders shared information about their positions and knowledge of client orders through instant messages to rig the foreign exchange market in their favour.

FCA chief executive Martin Wheatley told MPs earlier this year that allegations surrounding forex trading were "every bit as bad" as the Libor rate-rigging scandal, which has cost banks billions in fines.

Carney's three-part evidence session before the Treasury Select Committee will begin with a section on the Bank's Inflation Report last month.

The publication of the report saw policy makers abandon the forward guidance policy linking interest rates to unemployment after just six months, as the jobless rate had improved much more quickly than previously anticipated.

Carney said at the time that the economic recovery was "neither balanced nor sustainable" and that rates would have to stay well below pre-recession levels of around 5% for the next few years.

Deputy governor Charlie Bean said in his latest speech that this was likely to mean rates being at 2-3% "for some while".

Martin Weale, another member of the Bank's Monetary Policy Committee, has said that they are likely to rise from their current rate of 0.5% - where they have been since 2009 - in spring next year.

The evidence session will also address the "economics of currency unions" amid debate over the possible implications of a Scottish vote for independence.

Chancellor George Osborne has already ruled out a currency union between an independent Scotland and the rest of the UK.

First Minister Alex Salmond's Scottish Government wants to create a "sterling zone" with the rest of the UK if there is a Yes vote in the break-away referendum.

Carney said in a speech in January that an effective currency union would force a newly-independent Scotland to hand over some national sovereignty in a similar way to how this is done in the eurozone.

"Any arrangement to retain sterling in an independent Scotland would need to be negotiated between the Westminster and Scottish parliaments," he said. "The Bank of England would implement whatever monetary arrangements were put in place."

Carney's major appearance comes after the Huffington Post UK revealed that the governor had urged the chancellor to consider drafting some women onto the Bank of England's nine-man Monetary Policy Committee.