Sam Woods, chief executive of the Prudential Regulation Authority (PRA), warned that UK taxpayers faced a ‘significant loss’ from the government-backed loans distributed to small companies during the pandemic, warning banks that the ‘tougher bit’ is on its way.

He told a London School of Economics webinar: “Firms which have been sustained by the government support and by all the loan programmes and all of that, some of them will actually start to go bust.”

Chancellor Rishi Sunak has today announced a ‘pay as you grow’ system for UK firms allowing them to extend COVID-19 Bounce Back loans from six to ten years.

Speaking at the same event, Andrew Bailey, the governor of the BoE said that fears it was compromising its independence by purchasing government debt were ‘entirely without merit’.

Mr Bailey rejected claims that the BoE was financing the government’s pandemic response through quantitative easing, which has made it the main buyer of government debt. The BoE’s primary main aim is to keep inflation close to its 2% target. However, some have accused the bank of “monetary financing”, or directly funding government borrowing.

Mr Baily said: “Independent pursuit of an inflation target does not mean that monetary policy is uncorrelated with other macro policies, including fiscal policy.

“It is hardly surprising, and indeed consistent, that the government should be able to benefit from those financing conditions. If the situation was otherwise, and the central bank acted to prevent counter-cyclical policy taking effect, we would be abandoning the remit on which our operational independence is based.”

The bank’s governor said that he was glad that central bank independence was being “vigilantly scrutinised” but added: “I’m sorry to have to be blunt, I’m afraid these arguments are entirely without merit.”

With interest rates already close to zero, the bank has been relying on its asset purchasing to support the UK economy. The BoE still has about £140 billion of QE to complete this year, having expanded the scheme in November.

Mr Bailey’s comments came after the BoE published the findings of a review into negative interest rates alongside its latest monetary policy decision on Thursday.

The central bank has been assessing whether the policy could work in the UK and concluded that it was “operationally feasible”, The Times reports.

Ben Broadbent, a deputy governor at the Bank, told CNBC on Friday: “We want to ensure that at the very least it was not the technical feasibility of negative interest rates that might prevent their use. There are deeper issues… about their effectiveness, but the technical feasibility should not be something that stands in the way of them.

“We have yet to take that decision. All these options remain open. We have not ranked them.”

On Thursday, the bank’s monetary policy committee held rates at 0.1% and left the stock of QE unchanged at £895 billion.