Time to wrap up… here are today’s main stories:

Robert Chote, the former head of the OBR, is urging everyone involved reflect on how you make it an orderly process so the fiscal watchdog can serve the public as well as possible.

Asked about the events of the last week – from the leak of the OBR’s outlook report, to its letter to the Treasury Committee outlining how the forecasts evolved, the Treasury’s annoyance at that, and then Richard Hughes’s resignation as OBR chief yesterday – Chote says the leak was “a very serious and unfortunate episode”.

And he pays tribute to Hughes for the work he has done over the last five years since taking over from Chote.

Chote tells the House of Lords economic affairs committee:

He has done an awful lot of great value for the work of the OBR, and his decision to step down based on what he thought was best for the future of the organsiation is entirely in character with what I would expect, and consistent with the spirit of public service that he has brought.

And that’s the end of the hearing.

It is ‘nonsense’ to claim that the Office for Budget Responsibility has forced governments to change policy, former OBR chief Robert Chote says.

During his session with the House of Lords economic affairs committee, Chote is questioned by former chancellor Norman Lamont, who asks:

Q: Are governments sufficiently clear that their scope for action against the background of fiscal rules is self-imposed?

Chote replies that this issue has, on occasions, been framed “very unhelpfully” as a situation where the OBR has forced decisions on governments.

He says:

There are occasions where governments say they have been forced into a decision by the OBR or some forecast change that the OBR has made, That’s nonsense.

Chote explains that the OBR provides its best assessment of the outlook for the public finances, including variables that the government may have decided it wants to target, on the basis of current policy, and will talks about the uncertainties around those.

But he insists that the elected politicians have the choice about what to do if they are off-track against their fiscal rules.

Chote explains that if the OBR comes to the chancellor in the run-up to the budget, and says “you are not on course to achieve the target you set yourself”, it is for them to decide whether to change the policy, to change the rules, or decide they are content for the forecast to show that target is being missed, and they will address that at a future fiscal event.

Sir Robert Chote, the former head of the Office for Budget Responsibility, is testifying to the House of Lords economic affairs committee now, about the UK’s fiscal framework.

Chote explains that the OBR has brought valuable transparency to the public finances, by producing its economic forecasts and assessing policy.

The OBR, he says, is unusual in producing the official forecast for the economy and public finances and incorporating the official measures, Chote.

Other fiscal councils in other countries either comment on the reasonableness of the forecasts, or produces a parallel forecast.

Chote says we can’t run the counterfactual of what the UK’s debt/gdp ratio would look like without the OBR.

Referring to his time running the OBR, from 2010 to 2020, Chote says self-deprecatingly:

I’d like to think that at the margins, the OBR has encouraged better policy decisions than there otherwise would have been

But I have to put my hand up. The public finances were worse when I left the OBR than when i arrived, but I don’t think that was entirely down to me. There were some external shocks that came along.

Chote, now president of Trinity College, Oxford, then explains why the OBR is valuable:

The real value is in having that transparency, the integrity of independent analysis with which reasonable people may disagree, but putting that forward for the benefit of the public, for investors, for voters, for parliament.

Shares in Warner Bros Discovery have jumped at the start of trading as it receives a second round of takeover bids.

New offers on the table for Warner Bros Discovery include a mostly cash offer from Netflix, Bloomberg reported last night, adding that bankers for Paramount Skydance and Comcast also worked over the Thanksgiving weekend on new bids.

This latest auction round comes after Warner rejected a mostly cash offer of nearly $24 a share from Paramount, and started a strategic review that could result in a sale.

In early Wall Street trading, shares in Warner Bros. Discovery are up 1.35% at $24.21.

Influential investor Michael Burry has warned that he sees tough times ahead in the stock market.

Burry, one of the main charactors in The Big Short, has told the Against The Rules podcast that he sees several “bad years ahead”.

Explaining why he recently closed his hedge fund, Burry said he didn’t want a repeat of the run-up to the 2008 crisis when he faced repeated criticism from investors for betting against the US housing market, before being proved right when financial crisis erupted.

Burry says:

I think that we’re in a bad situation in the stock market. I think the stock market could be in for a number of bad years.

I think it could be a longer bear market, more akin to 2,000 [when the dot-com bubble burst].

Burry argues that the structure of the market today means that more money is invested “passively”, through index funds, with perhaps less than 10% actively managed.

That increases the chances of a wide sell-off, Burry arges, saying:

Now I think the whole thing is going to come down.

Burry then explained that having closed his fund, he has recreated his positions in his own account, including a bet against data firm Palantir.

Explaining why, he says:

There are five billionaires who came out of Palantir, because they owned Palantir stock. The revenue was $4bn. The billionaires to revenues ratio was greater than one, and I’d never seen that before.

Looking back to the 2008 crisis, he told podcast host Michael Lewis (who wrote The Big Short) that it was “a very unique circumstance” and a “once in a century trade”.

The key, he explains, was that he was permitted to buy insurance on housing bonds which were incredible illiquid, and then profit off that insurance without actually owning the insured item.

The OBR has declined to criticise Rachel Reeves over the speech she gave at the start of November implying that she would need to raise income tax.

Prof David Miles told the Treasury committee today that the chancellor was not misleading when, on 4 November, she appeared to lay the groundwork to raise income tax rates

Miles told the committee:

My interpretation was, and others might interpret differently, that the chancellor was saying that this was a very difficult budget and very difficult choices needed to be made.

And I don’t think that that was in itself inconsistent with the final pre-measures assessment we’d be made which, although it showed a very small positive amount of so-called headroom, it was wafer thin.

Andrew Sparrow’s Politics Live blog has more details from the OBR’s session at parliament.

The upheaval at the Office for Budget Responsibility, whose chair resigned last night over the early release of its budget documents last week, has not caused alarm in the markets.

UK bond prices have slipped a little today, which has nudged the yield (or interest rate) on the debt a little higher, wiping out more of the immediate rally after the budget.

The yield on 10-year gilts is up 2.5 basis points, to just over 4.5%, slightly higher than at the start of Budget Day last week

30-year gilt yields have risen by 3bps to 5.28%, still lower than before the budget.

Bill Blain, CEO of Wind Shift Capital Advisors, suspects there may be change at the Office for Budget Responsibility, writing:

When the organisation that is supposed to exude market stability becomes the cause of instability…. Then it’s time to move on. The resignation of Richard Hughes had an inevitability about it… The question for markets will be the independence of what follows…

Away from the Bank of England, the OECD has forecast that the UK will be the third-fastest growing member of the G7 next year.

In a new report, the Paris-based thinktank has warned Rachel Reeves that tight government spending and higher taxes will restrict consumer expenditure.

The OECD predicts the UK economy will grow by 1.2% in 2026, faster than France, Germany, Italy and Japan, but slower than the US (1.7%) and Canada (+1.3%).

More here:

Another line from the Bank of England press conference: it is paying close attention to dollar funding gaps at banks.

Governor Andrew Bailey told reporters in London said dollar supervision had improved since the global financial crisis but the central bank had to “watch that very carefully”.

He said:

“We do spend a lot of time in the Bank of England looking at...what would be the context or a stress in those markets, and how would they feed through into our system, and what access might we need to dollars as a system.”

Having resisted two invitations to comment on the Office for Budget Responsibility, Bank of England governor Andrew Bailey can’t resist swishing at the third (has he been watching England batting in Australia?)

Q: You have commented on political attacks on the Federal Reserve before, so are the political attacks on the Office for Budget Responsibility dangerous?

Bailey reminds today’s press conference that there are good reasons why the Office for Budget Responsibility was created by George Osborne in 2010, telling reporters:

The reason the OBR was created was to ensure there was a source of independent forecasting and an independent assessment of fiscal policy.

That’s important, it’s important in many countries. Britain’s not unique… there’s nothing unusual about this absolutely core principle.

So where attacks on the OBR are concerned, Bailey says we should “please remember why it was done and the principles underlying it”.

However, it’s not for the Bank to get involved in “the day-to-day affairs of that”, he adds.

Q: You say that financial risks are increasing, so isn’t this the worst time to be loosening bank’s capital ratios?

Andrew Bailey says the question of timing is important, pointing to the stress tests results (which showed banks were resilient).

He adds:

We’ve been through some very, very substantial economic shocks in recent years, and the banking sector has come through those robustly.

So it is ‘perfectly sensible and responsible’ to come to today’s conclusions (the decision to reduce the amount of capital lenders must hold in reserve).

Q: Various other measures brought in after the 2008 crisis, such as bankers’ bonus rules, are also been pared back – did regulators go to far after the crisis?

Bailey denies that the Bank ‘overdid it’ in its post-crisis mode, insisting that all its measures were sensible.

He adds:

We learn from experience.. that’s why we feel comfortable making these changes.

Q: Does the Bank of England agree that the leaks ahead of last week’s budget were to be “deplored”, as the Office for Budget Responsibility said yesterday. Were you alarmed by the OBR leak and the heavy briefing by the Treasury which apparently moved the markets – should there be an inquiry?

Andrew Bailey refuses to comment on this, as the Bank isn’t involved.

Q: Has the Bank taken measures to avoid its own reports being accidentally leaked early?

Protecting market sensitive information is very important, he replies. That’s why the Bank confined reporters in a windowless room at a very early hour this morning, he adds, so they could see information before it was officially released.

Bailey says the Bank looked ‘very carefully’ at yesterday’s report into the OBR’s blunder, to see what it could learn about releasing information.

The Bank uses “different procedures” when releasing information, Bailey says, adding:

We always seek to learn from these events and we are looking at it very carefully to see if there’s anything there we should be aware of, and act if necessary.

Q: Has the Bank compromised its independence by caving into Rachel Reeves’s demands to support growth, my colleague Kalyeena Makortoff asks.

BoE governor Andrew Bailey says it is “perfectly reasonable” for the Treasury and chancellor to set out how they see the Bank’s remit [in November 2024, Reeves wrote to the Bank urging it to ensure the financial system is supporting economic growth].

Bailey repeats that financial stability is a pre-condition for growth.

But, it does think its changes are consistent with that – it isn’t efficient to hold more capital than needed (when it could be used in the real economy).

Q: Do you reserve the right to reverse this capital cut before it comes in, in 2027, if there is a downturn?

Bailey says the Bank will continue to conduct stress tests, every two years for the banks.

So it will “obviously” be heavily influenced by what happens, and what those stress tests show.

The Bank of England are now fielding questions from the press – and the first homes in on today’s decision to ease capital rules for high street banks for the first time in a decade.

Q: Are today’s cuts to bank capital ratios sowing the seeds for the next financial crisis?

Governor Andrew Bailey says the decision was taken in the light of the evolution of the banking system, and the economic conditions today.

He insists it is a “sensible reflection of conditions”, and also “a sensible reflection of the health of the banking system”.

Playing down concerns about the decision, Bailey says:

“I don’t have any concerns about this in terms of where it takes the regulatory system to. I think it’s a sensible thing do to.”

Q: Can you stop the banks simply using this cut to boost their dividends?

Bailey says it’s not up to the Bank of England to tell banks how to run their busineses.

But there is a “two-way” relationship here, he adds: if the banks support the economy by lending, that will strengthen the economy, and the banks will benefit.

The Bank of England are holding a press conference now to present their financial stability report, plus their work on helping create sustainable economic growth, and the results of their bank stress tests.

You can watch it here:

Andrew Bailey begins by apologising for the state of his voice, which is sounding a little croaky….

He begins by explaining that overall risks to financial stability have increased during 2025 (as flagged in the introduction to this blog).

Bailey says:

Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets, which could stack to amplify the risk of these risks crystalising.

He adds that as governments face rising spending pressures, they may have less capacity to respond to shocks in the future.

Elevated geopolitical tensions increase the risk of cyber-attacks and other disruption, he warns.

He then turns to concerns about AI valuations, another key theme in today’s report, saying:

On some measures, equity valuations in the US are approaching levels not seen since the dot-com bubble, and in the EU and UK since the global financial crisis (GFC).

The AI sector is a particular hotspot, and somewhere where the role of debt financing is increasing quickly as firms seek large-scale infrastructure investment.

UK consumer confidence declined in the run-up to last month’s budget, as people grew more worried that they might lose their jobs.

The YouGov/Centre for Economic and Business Research consumer confidence index, released this morning, has dipped by 1.2 points to 108.0 (where any reading over 100 shows positive setiment).

The index shows falls in perceptions of job security (to the lowest since May 2023), home values and outlook for household finances last month.

People’s perceptions of their job security over the past thirty days also fell 1.3 points to 94.4, meaning that measure remains in negative territory (as it’s below 100).

Sam Miley, Cebr’s head of forecasting and thought leadership, says:

“Uncertainty in the run-up to the Autumn Budget likely drove the dip in consumer confidence in November. Other economic developments may have compounded the decline. For instance, the simultaneous falls in the home value indices may have been the result of the Bank of England’s decision to hold interest rates early in the month.

Meanwhile, the unemployment rate recently reached a four-year high, weakening perceptions of current and future job security.”

Today’s stress test results show the UK banks are in “robust health,” says Matt Britzman, senior equity analyst at Hargreaves Lansdown:

The UK’s seven biggest banks sailed through the latest stress test, reaffirming their resilience and earning a regulatory nod to ease capital buffers. Most banks already hold capital well above the minimum by choice, so any shift in strategy may take time - but in theory, it frees up extra capital for lending or capital returns.

However they use the new freedom, this is another clear signal that the UK banking sector is in robust health. This was largely expected, but the confirmation should still be taken well, especially after dodging tax hikes in last week’s Budget. UK banks have been on a tear over the past two years from deeply depressed levels - valuations aren’t as cheap anymore, but there are still some solid catalysts in play and the potential for strong shareholder returns ahead.

Shares in UK banks are a little higher this morning, led by Lloyds Banking Group (+1%), Barclays (+0.95%) and HSBC (+0.7%).

UK house prices rose last month despite uncertainty before the budget, according to new data from Nationwide.

The UK’s biggest building society said the average house price rose 0.3% month on month in November, higher than a 0.1% increase predicted by economists polled by Reuters. The average price of a home was £272,998, up from £272,226 in October.

But on an annual basis, house price inflation slowed to 1.8% in November, down from 2.4% in the year to October.

Robert Gardner, Nationwide’s chief economist, has predicted that the newly announced “mansion tax” would have a limited impact on the housing market.

“The changes to property taxes announced in the Budget are unlikely to have a significant impact on the housing market. The high value council tax surcharge, which is not being introduced until April 2028, will apply to less than 1% of properties in England and around 3% in London.

More here:

The Bank of England is planning to ease capital rules for high street banks for the first time in a decade, marking the latest attempt to loosen regulations designed to protect the UK economy in the wake of the 2008 financial crisis.

The central bank has proposed lowering capital requirements related to risk weighted assets, by one percentage point to about 13%, reducing the amount lenders must hold in reserve. The move is designed to make it easier to lend to households and businesses.

Capital requirements act as a financial cushion against risky lending and investments on bank balance sheets.

It came as fresh stress tests showed that the UK’s seven largest banks – Barclays, Lloyds Banking Group, Nationwide, NatWest, Santander UK and Standard Chartered – are strong enough to continue lending through “a severe but plausible” economic downturn [see previous post].

The Bank said its proposed new capital rules were “consistent with its view that the banking sector can support long-term growth in the real economy in both current and adverse economic environments”.

More here:

Britain’s seven largest banks have all passed the latest stress tests carried out by the Bank of England.

The BoE announded this morning that all seven lenders have enough capital to withstand a deep global recession, large falls in financial markets and a jump in interest rates.

This means Barclays, Lloyds Banking Group, Nationwide, NatWest, Santander UK and Standard Chartered are strong enough to continue lending through “a severe but plausible” economic downturn, in the Bank’s view.

Announcing the results alongside today’s financial stability report, the Bank says:

The results of the 2025 Bank Capital Stress Test demonstrate that the UK banking system is able to continue to support the economy even if economic and financial conditions turn out to be materially worse than expected. This underscores the role of financial stability as a pre-condition for sustainable growth.

The Stress Test examined how the banks would fare if they faced a severe negative global supply disruption that led to deep recessions across global economies.

The report found that no individual bank needs to strengthen its capital position as a result of the test, but there were differences in how they performed:

• UK-focused banks – Lloyds Banking Group, Nationwide Building Society, NatWest Group and Santander UK Group Holdings plc were most affected by the UK macroeconomic stress, driven by higher interest rates, inflation, unemployment and house price falls.

• Internationally-diversified banks – Barclays plc, HSBC Holdings plc and Standard Chartered plc faced additional pressures from global downturns and traded risk shocks in markets such as Hong Kong, China, the US and Europe.

Hedge funds who dabble in the market for UK government bonds in the search for profits are another threat to the country’s financial stability.

The Bank of England’s new financial stability report shows that leveraged borrowing by hedge funds in gilt repo markets “remains elevated”, reaching close to £100 billion in November.

This activity is related to the popularity of the “cash-futures basis trade”, the Bank suggests. That’s the arbitrage strategy that involves profiting from the temporary price difference between a financial asset’s cash market price and its futures contract price.

The Bank fears this could create market instability, if hedge funds all tried to pile out of the market at the same time, saying:

A small number of hedge funds account for more than 90% of net gilt repo borrowing, with trades often transacted at zero or near-zero collateral haircuts and at very short maturities and so require regular refinancing. These vulnerabilities, in the context of compressed risk premia in a highly uncertain global environment, increase the risk of sharp moves.

Funds could need to deleverage simultaneously in response to a shock if funding conditions tightened to the extent that refinancing became unavailable or prohibitively expensive. This reinforces the need for market participants to ensure the risk management of their positions takes account of potential shocks, including correlation shifts outside historical norms.

Back in September, the Bank published a discussion paper evaluating various reforms to enhance the resilience of the gilt repo market. However, any structural reforms will take time to implement, so it is urging market participants ensuring they are preared for shocks.

Overall, the ratio of UK household savings to income remains elevated, which should provide resilience to potential future shocks.

But, the Bank warns, some groups are more vulnerable to economic shocks than others.

And it singles out renters as one vulnerable group, citing evidence that the gap in median savings to income between outright owners and renters has widened this year.

While falling rental price inflation is likely to somewhat ease pressures on renters, renters also continue to be more likely to report financial difficulty and insufficient emergency savings.

Around 35% of households are renters, so sharp spending cuts or defaults on their financial obligations in the event of economic shocks can pose financial stability risks [this blog post has more details].

The Bank of England has also produced a neat chart to show how AI stocks have driven the high valuation and growth of the US stock market, as investors have piled in on the expectation of high future earnings growth.

The chart, in today’s financial stability report, shows the year-to-date price change of S&P 500 stocks (y-axis), and the next 12 month price-to-earnings ratio for each stock (x-axis).

As you can see, many AI stocks are trading at a higher price-to-earnings ratio than the rest of Wall Street, a sign that much higher profits are expected in future years.

As the Bank explains:

The share prices of many AI companies are partly underpinned by high expected future earnings growth over several years, contributing to those companies – and subsequently the equity indices which they comprise a significant part of – appearing historically expensive in valuation metrics which consider past, current or only near-term future earnings [see chart above].

The US excess cyclically-adjusted price-to-earnings (CAPE) yield – a measure of equity risk premia (ERP) which considers past earnings – is close to its lowest level since the dot-com bubble. CAPE is a backward-looking measure, but even ERP calculated from the excess yield of three-year forward earnings expectations is at its most compressed level in 20 years. Whether these earnings will be realised, or even prove underestimates, is uncertain.

As flagged in the introduction, the Bank is also concerned about the growing role of debt financing in the AI sector, pointing out that this has increased through the second half of 2025.

This poses financial stability risks, it cautions:

Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks.

AI infrastructure spending over the next five years could exceed $5tn, according to some forecasts, implying that these links could deepen further.

So far, the bond market has bought the splurge of AI debt without complaint.

But… the BoE fears this situation may not last, and points out that the cost of insuring Oracle’s debt against default has risen since the summer.

It says:

The bond market has absorbed this issuance so far – US IG corporate bond spreads remain near their lowest level over the past 15 years.

But debt securities and credit derivatives associated with AI companies can quickly reprice in response to changes in outstanding debt volumes and/or future earnings expectations.

For example, the five-year credit default swap spreads of Oracle – an AI company which has lower free cash flow margins than some other larger hyperscalers and has issued a large amount of debt this year to finance AI infrastructure spending – has widened from less than 40 basis points to around 120 basis points since end-July (by contrast, the credit default swap spreads of US IG corporates more broadly – as proxied by the CDX North American IG five-year index – are broadly unchanged over the same period).

The good news from today’s financial stability report is that the Bank of England believes the UK banking system is well capitalised, maintains robust liquidity and funding positions, and asset quality remains strong.

UK household and corporate aggregate indebtedness remains low too.

But, today’s Financial Stability Report also warns that the UK is notably vulnerable to global shocks that ripple through the global economy, saying:

As an open economy with a large financial centre, the UK is exposed to global shocks, which could transmit through multiple, interconnected channels. Stress in one market, such as a sharp asset price correction or correlation shift, could spillover into other markets.

Simultaneous de-risking by banks and non-banks can lead to fire sales, widening spreads and tightening financing conditions for UK households and corporates. Market participants should ensure their risk management incorporates such scenarios.

The Bank of England also cites the credit markets as a potential risk to the economy.

It points to the failure this autumn of US companies First Brands and Tricolor, which have already raised concerns about weak lending standards and potential threats from the so-called shadow banking sector.

The financial stability report says:

Credit spreads remain compressed by historical standards.

Two recent high-profile corporate defaults in the US have intensified focus on potential weaknesses in risky credit markets previously flagged by the FPC. These include high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies, and illustrate how corporate defaults could impact bank resilience and credit markets simultaneously.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Risks to the financial stability of the UK have increased during 2025, the Bank of England is warning this morning, as it cites the risk of a stock market crash triggered by highly-valued AI companies.

The Bank is issuing its latest assessment of the UK financial system, and warning that the global risks threatening the country remain “elevated”, citing geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets.

These elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions, the Bank points out, also citing the “material uncertainty in the global macroeconomic outlook”.

And the Bank singles out the surge in valuations of artificial intelligence companies this year, saying that this “heightens the risk of a sharp correction”.

The Bank’s Financial Policy Committee say that many risky asset valuations remain “materially stretched”, particularly for technology companies focused on AI, adding:

Equity valuations in the US are close to the most stretched they have been since the dot-com bubble, and in the UK since the global financial crisis (GFC). This heightens the risk of a sharp correction.

AI companies have been driving the US stock market higher this year. Shares in chipmaker Nvidia, for example, are up 34% this year despite a 10% drop in the last month.

The FPC also sounds the alarm about the use of debt financing in the AI sector, and the web of multi-billion dollar deals between the various companies, explaining:

By some industry estimates, AI infrastructure spending over the next five years could exceed five trillion US dollars. While AI hyperscalers will continue to fund much of this from their operating cash flows, approximately half is expected to be financed externally, mostly through debt.

Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks.

More details to follow…

The agenda

• 7am GMT: Nationwide house price index for November

• 7am GMT: Bank of England publishes its latest Financial Stability Report,

• 7am GMT: Bank of England publishes its latest stress test results

• 10am GMT: Bank of England press conference with governor Andrew Bailey, and deputy governors Sarah Breeden and Sam Woods

• 10am GMT: OECD releases its latest economic outlook

• 10am GMT: Treasury Committee hearing on the budget with the OBR