Concerns raised over Bank of England's new risk watchdog

New regulatory powers look like giving the Bank of England more clout than any other major central bank, but concerns are growing that it has bitten off more than it can chew.

The Bank's new risk watchdog, the Financial Policy Committee, will hold its first formal meeting today. It will discuss where trouble might be brewing for the financial system and what needs to be done about it.

The watchdog's toolkit has yet to be formalised, but is likely to include the power to demand tougher lending restrictions and higher capital requirements if it feels a bubble may be forming.

Under the government proposals, Bank Governor Mervyn King will chair both the new systemic risk committee, which will meet at least quarterly, and the monetary policy committee.

Legislation for the new framework will not be completed until late next year, but questions are already being asked about how King - and the three other MPC members who will sit on the FPC - will manage their expanded workload.

Former rate-setter Sushil Wadhwani argues that it would make more sense to hand the stability reins to the current MPC so it could set policy for the two simultaneously. "I believe it is a poor idea to have two one-club golfers; a single player with multiple clubs to choose from would be preferable," he says.

Another worry is the potential for a conflict of interest between the Bank's monetary and financial stability aims, particularly where economic conditions argue for higher interest rates, while the fragility of the financial system argues for more policy stimulus.

Some analysts believe a fear of destabilising Britain's fragile financial system has already led the BoE to temporarily turn a blind eye to inflation. Inflation has been persistently higher in Britain than in any G7 economy and has exceeded the BoE's target for 34 of the past 40 months. The majority of rate-setters, however, are in no rush to raise interest rates, which have stayed at 0.5 per cent for over two years.