Financial Market

The turmoil in the banking sector and currency markets yesterday signalled that the financial crisis is not yet over. £/$ fell 3% to a 7-year low and UK government 5yr CDS widened 17 points to a new high of 142.5. The Bank earlier this month stated that further measures will probably be required to increase the flow of lending to the non-financial sector. Governor King touched on this topic during his speech yesterday (stating that they would take the form of purchases by the BoE of a range of financial assets in order to expand the amount of reserves held by commercial banks).

The drop in headline CPI to 3.1% was less than expected but the delayed impact from cheaper energy prices means we still expect CPI to fall below the 2% target by May. UK labour market data are due this morning and may reveal a step up in the pace of unemployment. Monthly rises in the claimant count total typically average around 100,000 at the height of recession. Our forecast is for a rise of around 80,000 in December. The toll of the recession on UK tax receipts and the rise in public spending are likely to be underlined in the latest public finances data.