Andrew Bailey is poised to clash with Rishi Sunak, the Chancellor, over a plan that would allow ministers to reverse decisions by City regulators.
The Governor of the Bank of England is opposing Treasury proposals to include a so-called “call-in power” in the Financial Services and Markets Bill, which is expected to be introduced this year.
Mr Bailey has expressed concerns about the clause, claiming that it would undermine perceptions of Threadneedle Street’s independence, Sky News first reported.
It comes amid growing tensions between the Government and financial regulators, with ministers accusing the Bank of England’s Prudential Regulation Authority (PRA) of blocking a wave of post-Brexit reforms.
Last week, a Government insider told The Telegraph that the regulator is "100pc" resisting cuts to red tape in the wake of Britain's departure from the European Union.
One area where the new “call-in power” could be invoked is around an overhaul of the controversial Solvency 2 rulebook, which ministers fear is being held up by resistance from the PRA.
The current rules require UK insurers to hold vast sums of cash on their balance sheet. Industry chiefs have said they could unleash a £90bn-plus investment “Big Bang” if regulations are relaxed.
The “call-in power” is designed only to be used in circumstances where ministers believe it would be in Britain's national interest to intervene, the report said, and it would rarely, if ever, be used. Ministers would also likely need parliamentary approval before it is invoked.
The clash - 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.
A Treasury spokesman said: “As announced in the Queen’s speech, the forthcoming Financial Services and Markets Bill will enhance our position as a global leader in financial services, capitalise on the benefits of Brexit by cutting EU red tape and promote a competitive marketplace which spurs investment to deliver for individuals and businesses.
“The Bill will be introduced when parliamentary time allows.”
The Bank of England declined to comment.