By David Milliken

LONDON (Reuters) - The Bank of England is set to raise interest rates for a 13th time in a row on Thursday, a day after inflation data came in higher than expected again, with investors split on just how big the new hike will be.

Economists polled by Reuters last week were unanimous that the BoE would raise rates to 4.75%, their highest since 2008, from 4.5%.

But after inflation held at 8.7% in May, financial markets priced in a nearly 50% chance that the BoE would opt for a bigger move and raise rates by half a percentage point.

"I think it's a very finely balanced decision," said Tomasz Wieladek, chief European economist at U.S investment firm T. Rowe Price, who predicts at least three of the Monetary Policy Committee's nine members will vote for a half-point hike.

Britain's economy, which has been hit by the shock of Brexit as well as the COVID-19 pandemic and the surge in gas prices caused by Russia's invasion of Ukraine, has dodged a widely expected recession so far in 2023 though growth looks set to be a minimal 0.25% this year, according to the BoE's forecasts.

Unlike most other big rich economies, output has barely recovered to pre-pandemic levels. However, two inflation readings since the BoE's last rate hike in May have both been higher than expected, raising fears that Britain faces a more persistent price growth problem than the United States or the euro zone.

Households are now also seeing their mortgage bills rise, with average new two-year fixed-rates rising to 6.15% on Wednesday in anticipation of further rate hikes.

Financial markets were estimating that the BoE would keep raising rates until they hit 6% - their highest since 2001 - more than the U.S. Federal Reserve which is seen tightening by just a quarter point more and the European Central Bank which investors expect may move twice more.

"The UK has a uniquely bad inflation problem," Krishna Guha, a vice chairman at U.S. investment banking advisory firm Evercore, said.

Prime Minister Rishi Sunak - who has pledged to halve inflation this year in an attempt to win back voter support ahead of a national election expected in 2024 - has said he fully backs the BoE's efforts to tame prices.

However, Sky News said on Wednesday that unnamed members of the government thought Governor Andrew Bailey was failing at his job.

FALLING FASTER?

The central bank last month forecast that consumer price inflation, which peaked at a 41-year high of 11.1% in October 2022, would fall to just over 5% by the end of this year and be below its 2% target in early 2025.

A significant inflation drop is almost inevitable as energy prices come down from last year's peaks.

But incoming BoE policymaker Megan Greene - who will join the MPC next month - said last week that getting inflation from 5% to 2% may prove a tougher task than the initial fall.

Core inflation - which strips out more volatile prices to show an underlying trend - rose to a 31-year high in May.

Wieladek, who worked at the BoE from 2008 to 2015, said wages looked set to keep on growing at an annual rate of around 6%, almost twice the level consistent with 2% inflation, given the shortage of workers available to many employers.

In previous decades, British wage growth has only slowed after a large rise in unemployment, and Wieladek estimated the BoE would need to engineer a recession that pushed unemployment up to 6.0%-6.5% from its current 3.8% to achieve this now.

"Unfortunately, the Bank of England is in a situation where they will have to hike until something breaks," he said.

Most economists are less gloomy and think rates are more likely to peak near 5% as recent falls in energy and raw material costs affect the price of other goods and services.

"Market pricing for a lot more rate hikes could reverse quite quickly - especially if weaker inflation is ultimately allied with easing wage pressures," strategists at Nomura wrote.

By John Irish

PARIS (Reuters) -Leaders meeting this week at a summit in Paris are set to back a push for multilateral development banks like the World Bank to put more capital at risk to boost lending, according to a draft summit statement seen by Reuters.

Multilateral development banks are expected to be at the centre of talks on Thursday and Friday in the French capital when nearly 40 heads of state and government meet to nail down a roadmap for easing the debt burdens on low-income countries and making more funds available for climate financing.

An expert panel review for G20 nations last year found that multilateral lenders' management, government shareholders and their credit rating agencies were too timid about their financial risks.

The panel suggested a greater risk tolerance could free up several hundreds of billions dollars over the medium term.

A summit statement on multilateral development banks, which as a draft is subject to change, calls for a new push to be made "to optimise the use of capital by MDBs and encourage them to pursue innovative measures".

"This should include exploring incorporating a prudent share of callable capital into MDB capital adequacy frameworks (and) diversifying their sources of funding (including by exploring issuance of hybrid capital)," the summit statement said.

Callable capital is the funds government shareholders would be expected to stump up if ever a major development bank suffered big losses depleting paid-in capital, which has so far never happened.

Hybrid capital is financial instruments that development banks could issue to investors to raise additional funds.

The statement said that capital hikes for some unspecified development banks could be considered, but left it up to the board of each one to determine if and when one was needed.

The leaders are also set to support plans for rich countries to re-channel some of their unused special drawing rights at the International Monetary Fund - a global reserve currency - to development banks, including the African Development Bank and the Inter-American Development Bank.

NEW YORK (Reuters) - The International Monetary Fund is encouraged by the progress in discussions between Zambia and its official creditors, and an agreement could be reached "within a few days," the fund said in a statement on Tuesday.

"We are very encouraged by the significant progress being made in discussions between official creditors and Zambia on a potential debt treatment," a spokesperson for the fund wrote.

"We expect an agreement could be reached within a few days, which would allow the Executive Board consider the first review of the Fund-supported program within a few weeks."

The IMF said in early April that the next $188 million payout from a $1.3 billion support loan to Zambia was contingent on the government's reaching an agreement with its creditors.

Zambia's hopes of restructuring about $12.8 billion of external debt have been hampered by the concerns of its main creditors about the required scale of relief.

LONDON (Reuters) - British Prime Minister Rishi Sunak will unveil a major package for Ukraine, including $3 billion of additional guarantees to unlock World Bank lending, on the first day of a summit aimed at spurring efforts to rebuild the country on Wednesday.

At the beginning of the two-day Ukraine recovery conference in London, Sunak will outline a package which will also include 240 million pounds ($306 million) of bilateral assistance and an expansion of British International Investment in Ukraine.

Britain has been one of the main backers of Ukraine since Russia launched its full-scale invasion in February last year, and Sunak hopes the conference will cement London's standing while encouraging the private sector to do more to help rebuild.

"So, together with our allies we will maintain our support for Ukraine's defence and for the counter offensive, and we'll stand with Ukraine for as long as it takes as they continue to win this war," Sunak will tell the conference, according to excerpts of his speech released by his office.

"I'm proud that today we're announcing a multi-year commitment to support Ukraine's economy, and over the next three years, we will provide loan guarantees worth $3 billion."

Ajay Banga, president of the World Bank Group, said the guarantees would allow it to continue to help "people rebuild their lives after devastation".

The United States is also expected to set out "a new, robust" assistance package for Ukraine on Wednesday.

After more than a year of war in Ukraine, Sunak hopes the conference will encourage the private sector to use its resources to help speed Ukraine's reconstruction, but officials will also have to wrestle with the issue of offering some kind of insurance against war damage and destruction.

His office said he would also launch the London Conference Framework for War Risk Insurance at the summit and that some major companies had already signed up to the so-called Ukraine Business Compact, a statement of support for Ukraine's recovery.

Ukraine is seeking up to $40 billion to fund the first part of a "Green Marshall Plan" to rebuild its economy, including developing a coal-free steel industry, a senior Ukrainian official said before the conference.

The total bill will be huge, with Ukraine, the World Bank, the European Commission and the United Nations estimating in March that the cost was at $411 billion for the first year of the war. It could easily reach more than $1 trillion.

($1 = 0.7851 pounds)

LONDON (Reuters) - Pay awards by British employers remained the highest in more than 30 years in the three months to May, keeping pressure on the Bank of England which looks set to raise interest rates again on Thursday in a bid to tame high inflation.

Human resources data firm XpertHR said the median basic pay settlement in the three months to the end of May remained at 6%, matching the record increases seen in the five rolling quarters before but well below inflation which stood at 8.7% in April.

XpertHR has been tracking settlements since 1991.

Wednesday's data includes pay awards agreed in April, a key month for pay deals between employers and workers.

"Although inflation is beginning to fall as we enter the second half of this year, it still lies far ahead of pay rises, meaning employees will remain grappling with the effects of a real-terms pay cut," Sheila Attwood, senior content manager at XpertHR, said.

Consumer price inflation data for May is due to be published at 0600 GMT on Wednesday. Economists polled by Reuters expect the pace of prices rises to have eased to 8.4%.

The BoE is concerned that price rises could be harder to tame if pay deals keep growing. It is expected to increase Bank Rate by a quarter percentage point to 4.75% on Thursday, its 13th hike in a row.

Official labour market figures last week showed stronger-than-expected wage growth in April.

XpertHR said employers continued to report skills shortages and issues with staff retention, despite some signs of easing labour market conditions.

By Tetsushi Kajimoto

TOKYO (Reuters) - Business morale at big Japanese manufacturers edged up in June, staying in positive territory for a second straight month and reflecting a post-COVID economic recovery though uncertainty remains high amid slowing global growth, a Reuters poll showed.

Underlining the prospects for a service sector-led recovery, the non-manufacturers' index hovered near this year's high, the Reuters Tankan poll showed on Wednesday, bolstering the view that strong domestic demand may offset an export slowdown - a rare thing that would happen to export-reliant Japanese economy.

The monthly poll suggested there would be a steady recovery in business sentiment in the Bank of Japan's (BOJ) closely watched tankan quarterly survey due next on July 3.

The Reuters poll found manufacturers' mood was expected to rise over the coming three months, and service-sector morale would hover above +20.

In the Reuters poll of 493 large companies, of which 232 responded on condition of anonymity, many firms cited the post-COVID rebound in demand as a positive factor, while risks stemmed from overseas economies.

"We can expect a recovery in consumption and inbound demand as the coronavirus pandemic has calmed down," a manager of a paper/pulp firm wrote in the survey, noting that business conditions had turned for the better.

"A prolonged war in Ukraine and intensifying trade frictions between Japan and China have curbed capital expenditures at our clients while competition has heated up with overseas rivals," wrote a machinery maker's manager, who called business conditions "not so good."

The sentiment index for manufacturers stood at +8, up 2 points from the previous month, led by textiles/papers, oil refinery/ceramics, food processing and auto industry, according to the survey, conducted from June 7-16.

The manufacturers' index was up 11 points compared with three months ago. The index is expected to rise to +13 in September.

The service-sector index slipped one point from May to +24 in June, led by information/communications and transport/utilities.

Compared with three months ago, the service-sector index was up three points. The index is expected to drop two points to +22 in September.

The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure means pessimists outnumber optimists.

By Tim Hepher, Joanna Plucinska and Aditi Shah

PARIS/DELHI (Reuters) -Europe's Airbus secured a historic deal on Monday involving the most jets ever bought by a single airline, with an order for 500 narrowbody jets from Indian budget carrier IndiGo on the opening day of the Paris Airshow.

The multibillion-dollar deal eclipses Air India's combined purchase of 470 jets earlier this year as India's two largest carriers plan for a sharp expansion in regional travel demand.

IndiGo's order for A320neo-family jets follows months of negotiations first reported by Reuters. Industry sources said in advance of the Le Bourget event that a 500-plane deal was close.

"This is just the beginning, there's more going forward. With the growth of India (and) the growth of the Indian aviation market ... this is the right time for us to place this order," IndiGo Chief Executive Pieter Elbers told a news conference.

The aircraft will be delivered between 2030 and 2035.

Efforts by Indian carriers to keep pace with the world's fastest-growing aviation market, serving the largest population, have sent industry records tumbling even though manufacturers are struggling to meet output goals.

Indian carriers now have the second-largest order book, with an over 6% share of the industry backlog, behind only the United States, according to a June 1 report by Barclays (LON:BARC).

But some analysts have expressed concern that airlines could be over-ordering jets in pursuit of the same passengers.

After signing the IndiGo deal, Airbus CEO Guillaume Faury said it was premature to start thinking about narrowbody jet production rates higher than the planned 75 per month.

Airbus has faced problems in rebuilding production after the pandemic and has pushed back the mid-decade target to 2026, but Faury said supply disruption was a relatively short-term issue compared with the delivery schedules starting next decade.

Airbus has said it is considering developing a successor to the A320neo between 2035 and 2040, meaning IndiGo is likely to have negotiated the option to switch to any new model or cancel late deliveries rather than be leapfrogged, analysts said.

IndiGo, which accounts for nearly 60% of the Indian domestic market, is keeping Airbus as its supplier of single-aisle jets to squeeze out further economies of scale. But it has not yet decided which engine supplier to use for the latest order.

It switched supplier from Pratt & Whitney to GE-Safran venture CFM International about four years ago following issues with engines' durability.

IndiGo still has almost 480 jets left in the Airbus pipeline from previous orders. Elbers said the latest order would allow the airline to double in size.

IndiGo continues to hold separate talks with Airbus and rival Boeing (NYSE:BA) for 25 widebody planes, which could either be Airbus A330neos or Boeing 787 jets, sources have said.

Elbers declined to comment on any further plane orders.

By Gaurav Dogra and Patturaja Murugaboopathy

(Reuters) - Asian bonds attracted their highest monthly foreign inflows in about two years in May, boosted by hopes of less aggressive monetary tightening measures from the U.S. Federal Reserve.

Foreigners purchased a net $10.1 billion worth of bonds in India, Indonesia, Malaysia, South Korea and Thailand, marking their biggest monthly purchases since June 2021, data from regulatory authorities and bond market association showed.

"Asia ex-China (bonds) could benefit as the Fed approaches the end of its tightening cycle, notwithstanding residual uncertainty on the terminal rate," said Fiona Lim, senior fx strategist at Maybank.

"This is especially in light of an arguably resilient macro backdrop where services sectors continue to hold up in most countries."

While the Federal Reserve maintained interest rates without change, deviating from 10 consecutive rate hikes, it indicated the likelihood of two small rate hikes by year-end to address inflation concerns.

Analysts also noted that investors were encouraged by signs that regional economies had reached their peak inflation levels, leading to anticipated interest rate cuts by central banks to stimulate economic growth.

South Korean bonds attracted net purchases of $8.2 billion, the highest since June 2021.

Khoon Goh, head of Asia Research at ANZ, said the Bank of Korea is perceived to be mulling potential rate cuts towards the end of the year, boosting the appeal for their bonds.

Malaysia and Indonesian bonds drew foreign inflow worth $652 million and $500 million, respectively, while India and Thai bonds got about $400 million each in the last month.

Maybank's Lim said the disappointment over China's weaker-than-expected data in May, alongside U.S.-China tensions, could also have spurred a re-allocation of bond flows out of China into other Asian countries.

Although foreign demand for Chinese bonds slightly rebounded in May, the percentage of foreign holdings as part of total outstanding Chinese government bonds remained at 8.3%, the lowest since July 2019, according to a Barclays (LON:BARC) report.

SYDNEY (Reuters) - Australia's unemployment rate needs to rise to help contain inflation and avoid higher interest rates and a deep recession, a top central banker warned on Tuesday, after data showed little loosening in a still drum-tight labour market.

Reserve Bank of Australia (RBA) Deputy Governor Michelle Bullock said the jobless rate would need to rise to about 4.5% from the current rate of 3.6% to bring the economy back into balance, a rate still well below pre-pandemic levels.

"Our goal is to return the labour market back to a level more consistent with full employment ... We think this can be achieved if employment and the economy more generally grow at a below trend pace for a while," said Bullock at the Ai Group in Newcastle.

The RBA has already raised interest rates by 400 basis points to an 11-year high of 4.1%, including a surprise hike earlier this month out of fear that inflation was becoming entrenched.

Indeed, Bullock also warned that if inflation were to become entrenched in people's expectations, that would mean higher rates and a larger rise in unemployment.

"A deep and long-lasting recession would be likely, which would mean a substantial rise in the unemployment rate."

The RBA has projected inflation - which was running at about 7% - would return to the top of the bank's target range of 2-3% by mid-2025, but warned risks are on the upside amid concerns about low productivity, fast rising labour costs, and stickiness in services inflation.

SHANGHAI/SINGAPORE (Reuters) -China cut its lending benchmarks on Tuesday in the first such easing in 10 months, as authorities seek to shore up a slowing recovery in the world's second-largest economy, with more stimulus expected.

The latest monetary easing comes as China's post-pandemic recovery shows signs of losing steam after some initial momentum in the first quarter of this year.

The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.55%, while the five-year LPR was cut by the same margin to 4.20% from 4.30%.

A Reuters poll of 32 market participants showed all respondents expected reductions to both rates.

The People's Bank of China (PBOC) lowered short- and medium-term policy rates last week, signalling it is about to embark on another round of loosening in monetary settings in a push to rev up the recovery.

The medium-term lending facility (MLF) rate serves as a guide to the LPR and markets mostly see the medium-term rate as a precursor to any changes to the lending benchmarks.

"These cuts will lower the cost of new loans, as well as interest payments on existing loans," said Julian Evans-Pritchard, head of China economics at Capital Economics.

"That should offer some modest support to economic activity. But we think it is unlikely to drive a sharp acceleration in credit growth, given weak credit demand."

China's cabinet met on Friday to discuss measures to spur growth in the economy and pledged more policy support.

"More policy measures may be rolled out separately, including but not limited to a 25 basis point cumulative cut to the LPR by the year-end, and property-easing measures to cut payment ratios or mortgage rates, as well as some form of consumption support," analysts at BofA global research said in a note.

"Such marginal easing will probably help prevent growth from slowing sharply, but will unlikely offer a strong boost to reverse the growth slippage in the near future," they said, downgrading their forecasts for China's economic growth outlook for this year to 5.7% from 6.3% previously.

Several global investment banks cut their 2023 gross domestic product growth forecasts for China after May data showed the recovery was faltering.

The LPR, which banks normally charge their best clients, is set by 18 designated commercial banks who submit proposed rates to the central bank every month.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China last cut both LPRs in August 2022 to boost the economy.