CITY BETS ON HIGHER RATE BY AUTUMN FORECAST-BUSTING INFLATION PUTS BANK IN TIGHT SPOT

THE BANK of England will have to hike interest rates to a peak of 5.5 per cent to tame steaming inflation, markets bet yesterday, after fresh numbers showed price pressures are withstanding rate rises.

Inflation dropped to 8.7 per cent in April, down from March’s shock rise to 10.1 per cent, the Office for National Statistics said.

Last month’s fall meant the rate of price increases slumped out of the double digits for the first time since last summer.

But the figure smashed market expectations of a drop to 8.2 per cent and the Bank of England’s projected fall to 8.4 per cent.

Core inflation – which strips out volatile food and energy price changes – leapt unexpectedly to 6.8 per cent, the highest level since March 1992.

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Food prices rose nearly a fifth, the quickest pace in around four decades. Markets wobbled in response to the inflation overshoot, with the yield on the two-year gilt surging as much as 25 basis points and the FTSE 100 slumping around two per cent.

Sterling picked up gains before weakening around 0.15 per cent against the US dollar.

Bank governor Andrew Bailey yesterday claimed a “substantial amount” of the price surge is being driven by “imported inflation”.

But the shock core inflation jump and services prices climbing 6.9 per cent over the last year suggests domestic factors are now running the show.

Bailey said the Bank’s forthcoming interest rate decisions will be “driven by how the evidence shapes up”.

The governor and the rest of the Mone- tary Policy Committee have been slammed for failing to forecast the strength of inflation accurately.

Economists yesterday judged the upside inflation surprise as nailing on a 13th straight rate rise on 22 June.

Analysts at investment bank Nomura said they no “longer feel the data allow the Bank of England to stop after just one more hike”, adding they “see a terminal rate of 5.25 per cent being reached by September”.

Experts at consultancy Capital Economics agreed with that assessment, warning such a move by Bailey and co would make “a recession at some point more likely”.

Earlier this week, the International Monetary Fund ditched its recession call for the UK and raised 2023 GDP growth to 0.4 per cent from a 0.3 per cent contraction.

Hiking the rate to as much as 5.5 per cent –from its current 4.5 per cent –raises the possibility that the UK could still see a contraction, with the higher cost of borrowing choking off growth prospects and the flow of credit.

OPPORTUNITY KNOCKS Kyiv minister on investment lookout

A SENIOR figure in Ukraine’s government has called on the City of London to back the reconstruction of the country, days before heading to the capital to meet representatives of the tech sector here.

Speaking exclusively to City A.M., economy minister Oleksandr Gryban said that the country provides a “huge amount of opportunities” to international investors, with a World Bank insurance system in place to prevent significant war losses.

Gryban acknowledged that persuading investors to back projects in the country with war still raging was a difficult prospect but said the country’s “inevitable” membership of the European Union and a skilled workforce should be seen as attractive to those willing to take a risk.

Ukrainian president Vlodomyr Zelensky has described Ukraine’s postwar growth as “the greatest opportunity in Europe since World War II.”

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