The Bank of England hit back yesterday against claims that it had failed to act over manipulation of the $5.3 trillion (£3.2trn) a day foreign exchange market for up to eight years.
Paul Fisher, the Bank's director of markets, told the Treasury Select Committee that historic minutes released last week did not show evidence of rigging by currency dealers at banks on which the Bank should have acted.
Mr Fisher insisted that an apparent reference to rate manipulation in the July 2006 minutes of a meeting with traders merely referred to the frustrations of the forex dealers over market volatility. "Basically, it's a lot of traders whingeing about how difficult their life is, and no one is going to have much sympathy for that," he said.
The Governor of the Bank, Mark Carney, also told the committee that he had acted swiftly when the Bank was first directly implicated in the scandal on 16 October last year, saying he informed the Bank's supervisory Court of Directors on the very same day.
Some traders have alleged that the Bank tacitly approved the manipulation of the foreign exchange market – something that Threadneedle Street strenuously denies. But the Bank last week suspended an unnamed employee for failing to comply with internal procedures and revealed that the court has commissioned an independent report into the area.
Despite offering a robust defence of the Bank's conduct, Mr Carney also took the opportunity yesterday to announce a "root-and-branch review" of the Bank's market intelligence gathering operations, saying he would appoint a new deputy governor at Threadneedle Street whose prime responsibility would be banking and markets. "We have a £400bn-plus balance sheet and a series of issues that need to be addressed, and we will benefit from senior-most executive responsibility there," he said.
That means the total number of deputy governors at Threadneedle Street is set to rise to four, with the new official joining existing deputies who are responsible for monetary policy, financial policy and banking regulation. Further details of the institutional overhaul will be unveiled on 18 March.
More than 20 foreign exchange traders have so far been suspended or fired over the allegations of collusion between dealers and manipulation of currency rates.
Mr Carney insisted to the committee that the Bank would not tolerate any kind of financial market manipulation. "There appear to be individuals who have lost sight of what a market is – and that's unacceptable," he said. "They decided to cheat to make their lives easier. That is fundamentally against the principles of free markets and should be prosecuted to the fullest extent of the law."
Mr Fisher used to chair the Foreign Exchange Joint Standing Committee, which was a forum where Bank officials and traders could discuss market issues. Last week the Bank released the minutes detailing the meetings of a subcommittee of that forum. At one meeting in July 2006 traders discussed "evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix".
Andrew Tyrie, the head of the Treasury committee, said the Bank's new governance structures were facing their "first real test" in the shape of the forex inquiry and added that "early signs are not encouraging".
Earlier, Mr Carney told the committee that the Bank will never fully unwind its £375bn emergency programme to pump cash into the economy. At the beginning of his four and a half hour session, Mr Carney said the eventual sale of its gilt stocks would have an "impact" on debt markets, but he added: "We're not going to sell £375bn of gilts. That's a hypothetical question, purely hypothetical."
The Canadian added that the "world has changed" and the size of the Bank's balance sheet – swollen by the gilt purchases – would be "materially" larger going forward.
Mr Carney added that he did not expect the process of unwinding quantitative easing to begin until there had been "several adjustments" in interest rates – suggesting that it could take years.
He wants to have the flexibility to cut interest rates again should the economic recovery hit a sudden hurdle. It would be "more difficult" to adjust QE, but "interest rates are something we could move quickly".
Mr Carney said his personal view was that there was more slack in the labour market than the 1 per cent to 1.5 per cent view of the rate-setting Monetary Policy Committee.
MPC member Martin Weale, meanwhile, said the rapid slide in unemployment towards the Bank's current 7 per cent threshold for forward guidance had "reinforced" his doubts over the policy.
Q&A: Forex scandal
Q. What is the allegation
A. Investment banks are being investigated by regulators around the world for rigging currency markets. The Bank of England's Governor, Mark Carney, said yesterday that the issue was as serious as the Libor interest rate-rigging scandal.
Q. How would manipulation work?
A. Some $5.3 trillion (£3.2trn) of currencies are traded every day. And a key rate for that enormous market is the daily 4pm fix. The allegation is that currency dealers at large banks, who transact huge volumes of business on behalf of corporate clients, colluded to rig that benchmark rate by pooling information on large client orders. This collusion, it is claimed, enabled them to create profits for themselves.
Q. And what's this got to do with the Bank of England?
A. Some traders have alleged that the Bank was aware of what they were doing – and even encouraged it as a means of minimising market volatility. The Bank of England strenuously denies this and says an internal inquiry has, so far, uncovered no evidence to back it up. But the Bank did suspend one member of staff involved in foreign exchange last week for not following internal procedures. It is also setting up an external review of its conduct.