The possible involvement of Britain’s central bank in a global scandal over alleged foreign exchange rate manipulation risks, tarnishing London’s international reputation again, undermining City attempts to fight tighter European regulation.

The Bank of England’s decision to suspend a member of staff and launch a formal investigation into whether employees knew of, or condoned, forex manipulation has thrust the issue into the public spotlight.

With the guardian of the UK’s currency and main bank regulator becoming ensnared in the sprawling global probe, London’s position as the largest foreign exchange trading hub in the world is under scrutiny.

Mark Garnier, a Conservative MP and member of the Treasury select committee, pointed to a welter of regulatory initiatives coming from Brussels, including structural banking reforms proposed by Michel Barnier, the European internal market commissioner, last month.

“We have to demonstrate that we are good at this [financial services] and this type of thing doesn’t support the image we need to put forward,” he told the Financial Times.

“We are going to have to persuade everyone else in Europe . . . that they should listen to us. This is not helping.”

Instead, the BoE’s involvement is mirroring a situation two years ago when it was drawn into the scandal over the manipulation of the London Interbank Offered Rate, or Libor.

At that time, Barclays Bank released an internal email written by Bob Diamond, then its chief executive, that appeared to suggest Paul Tucker, the former deputy governor of the central bank, had known that Barclays was submitting artificially low borrowing costs to the Libor-setting process during the financial crisis.

Mr Tucker later told a parliamentary committee that he did not know or approve of ‘lowballing’ of submissions to this crucial interest rate benchmark.

The latest forex scandal is even more delicate, given the BoE’s dual role as a participant in the currency market and its regulatory oversight of the UK’s banking system.

“The bank’s wholly owned subsidiary, the Prudential Regulation Authority, is responsible for ensuring the safety and soundness of the UK’s banks, so the message must be that the physician had better heal itself, and quickly,” said Simon Morris, of law firm CMS.

London is the largest forex hub in the world, with 41pc of the daily global volume of $5.3tn being traded in the City, where almost all large banks have foreign exchange trading floors.

“London has an enormous reputational risk in this, which is why [the UK regulators] should really have the leading voice in this,” a senior consultant said.

Allegations that rival foreign exchange traders have shared information and colluded to move crucial forex benchmarks are the latest in a series of global financial scandals that have hit London disproportionately hard in recent years.

The most comparable in terms of market impact was the Libor affair, which has so far triggered the departure of several top executives and prompted $5.8bn in fines against banks.

Libor has not been a regulatory highlight for the BoE and the Financial Services Authority, which were accused of being slow to react. By contrast, the FSA’s successor organisation has been keen to stress its pivotal role in shedding a light on the most recent allegations of wrongdoing in the trading world.

Britain’s Financial Conduct Authority was the first regulator to start a probe into forex manipulation, Since then, the investigation has rapidly expanded to include more than a dozen regulators in the US, Europe and Asia, ensnaring more than 15 banks and prompting the suspension or dismissal of at least 22 traders.

Martin Wheatley, the FCA’s head, has made clear how seriously his organisation is taking the issue when he told a parliamentary select committee last month that allegations that traders colluded to rig prices in the $5.3tn spot FX market were ‘every bit as bad’ as Libor-rigging.

Minute by minute — How the Bank of England recorded its concerns:

July 4 2006: ‘It was noted that there was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix. This was not in the interest of customers’

October 9 2006: ‘There continued to be some unease about the methodologies used, latency in publication and how new matching technology . . . so-called ‘dark room netting’, might change the dynamics of fixing flows’

May 16 2008: ‘There was considerable discussion on [market fixings], with the large majority of members expressing concern about the lack of transparency among some methodologies’

Nov 11 2009: ‘There remained some concerns that this [an error in Japan] was a potential gap in the FX market and that a more robust process could help reduce the time spent resolving disputes and reduce the risk of price manipulation’

April 23 2012: ‘Processes around fixes. There was a brief discussion on extra levels of compliance that many bank trading desks were subject to when managing client risks around the main set piece benchmark fixings, eg WMR’