The Bank of England has admitted it will be forced to promote the City of London as a post-Brexit financial hub after Rishi Sunak rammed through new competitiveness rules.

Vicky Saporta, executive director at Threadneedle Street, said the Government’s decision to make regulators promote international competitiveness, rather than just protect financial and monetary stability, will significantly change how the Bank’s Prudential Regulation Authority (PRA) operates.

She said: “Let me be clear. I – and the PRA as a whole – know that this is a very important change… This is a big deal. It will make a big difference. We take the new objective seriously. We will make rules differently as a result.”

It comes after months of tensions between ministers and the Bank of England over the planned changes, which force regulators to take into account the impact of proposed rules on competition alongside financial stability. Officials at the central bank have publicly criticized the Government’s plans to deregulate parts of the City in a bid to boost the Square Mile.

Ms Saporta reiterated the criticism that the PRA’s new objective could undermine its primary goal of protecting financial stability.

Her comments came as the PRA announced plans to reduce restrictions on small lenders in an effort to take advantage of post-Brexit freedoms. The regulator is relaxing rules governing how much capital small lenders must hold, as well as regulations on disclosure requirements and pay policies.

Ms Saporta: “These are changes we could not have made whilst we were in the EU. They are a down-payment on our commitment to use our new powers to tailor rules and to make the UK a better place to operate a financial firm, without compromising on safety.”

The PRA will also hold a conference in September to explore how regulators can boost competitiveness and economic growth.

Simon Morris, a partner at City law firm CMS, said the Bank's announcements “studiously avoid the least indication of welcoming [its competitiveness objective]”.

He added: “Making the UK a more attractive place for financial business without lowering standards is a political tightrope – and the PRA finds itself a reluctant safety net.”

In further signs of strains between the government and regulators, Andrew Griffith, the City minister, has reportedly attacked the Financial Conduct Authority’s flagship reforms to stop consumers being ripped off by financial services companies. He has said privately that new measures could damage the sector.