Treasury on back foot as deputy Governor quits

One of the City's most high-profile economists, Rachel Lomax, is quitting her role as deputy Governor of the Bank of England at the end of June.

The Government has yet to find a successor for Ms Lomax, 62, who is leaving at the end of her five-year term, despite Gordon Brown's attempts to keep her on. A Treasury spokesman said the search for candidates had begun but a shortlist had not been put together yet.

An appointment needs to be made quickly because Ms Lomax has responsibility for monetary policy and sits on the influential Monetary Policy Committee. But the spokesman said that the Treasury must first appoint a new chairman for the Financial Services Authority, the City regulator, by the end of the month. The former CBI chief Lord Turner is only one of the candidates being considered by the Chancellor, Alistair Darling.

The deputy Governor role is a crown appointment, made on the advice of the Prime Minister. It will be a sensitive one to fill following the deterioration of relations between the Treasury, the Bank of England and the FSA caused by the Northern Rock debacle.

One internal candidate for the position would be Paul Tucker, the Bank's director of markets. The Governor of the Bank, Mervyn King, and his predecessor, Sir Eddie George, themselves came up through the ranks. External names include Paul Myners, chairman of Guardian Media Group, and Sir James Sassoon, the Treasury's ambassador to the City, a former UBS Warburg investment banker.

While the position is in the PM's hands, the Governor is consulted on the candidates. Sources say Mr King is keen that the deputy should be someone with strong markets experience rather than a civil servant. The Bank also needs a monetary expert to complement Sir John Gieve, the second deputy Governor, who came from the Home Office.

Ms Lomax is leaving the Bank because she wants to explore new ventures in business and has had enough of "watching monthly base rates". Over the past few years she has been a voice arguing for stability on the MPC, which meets monthly to review interest rates. The committee members tend to divide between the doves and hawks, but Lomax does not fall easily into either camp, and could be described as a dovish hawk. So far this year, she has voted twice for rates to be held and twice for a cut. She was even more cautious last year, voting on 10 occasions for rates to be maintained, once for an increase and once for a cut.

The Cambridge-trained economist was tipped as one of the favourites to succeed Mr King until he was reappointed by the Government for a second term.

Considered to be a brilliant administrator, Ms Lomax spent her early career at the Treasury, where she was private secretary to Nigel Lawson, then Chancellor, in the mid-1980s.

In a recent speech, Ms Lomax described the credit crunch as the "largest-ever peacetime liquidity crisis" and conceded there were many uncertainties facing the markets. She will have helped draw up the Bank's special liquidity scheme, launched a few weeks ago, which injected £50bn into the market by allowing banks to swap their mortgage securities for gilts.