Alistair Darling will announce this week the formation of a group to look at UK competitiveness in an attempt to repair the Government’s battered relations with the City.

Treasury sources said yesterday that the Chancellor had asked Stuart Fraser, the chairman of the City’s Policy and Resources Committee, to oversee the launch of the group, which will be chaired and staffed by senior industry representatives. One source said: “The objective is to engage with a broader range of the City.”

The group will consider issues such as immigration and anything that will “impinge on the competitiveness of the City” the source added. Mr Darling will place competitiveness at the heart of the Mansion House speech tomorrow when he outlines the challenges the City is facing in the face of the credit crunch and a slowing economy.

The Chancellor is bracing himself for a letter from Mervyn King, the Governor of the Bank of England, explaining why inflation has rocketed above the 2 per cent target. May’s figure, published this morning but already seen by Mr King, is forecast to be 3.1 per cent.

The Mansion House speech comes at a critical time for Mr Darling after a series of embarrassing U-turns on capital gains tax and non-domiciled residents, and amid growing anger within British corporations at proposals to change the rules around the taxation of foreign profits.

City figures, including Richard Lambert, Director-General of the CBI, have lambasted the Treasury and said that the policy changes have severely undermined Britain’s competitive edge. Last month, Mr Darling announced a new tax taskforce, under Jane Kennedy, the Treasury Secretary, to address business concerns on tax reforms. The formation of yet another group six weeks later underscores the importance Mr Darling is placing on the issue. As well as competitiveness, other working groups will focus on insurance and long-term savings as well as short-selling, Treasury officials said.

Mr Darling will use his speech to announce a series of banking reforms, including new powers for the Financial Services Authority to enable it to interrogate banks on their liquidity levels and to intervene if institutions get into trouble.

Mr Darling will also strengthen the markets division of the Bank of England with a panel to oversee its role in financial stability.

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