The ECB has increased its backdoor support for Greece during the recent crisis, according to Bank of Greece statistics. Lending by the central bank to the domestic banking system rose by €12.5 billion in February to a record €59.8 billion – see first chart. Banks used the cash partly to buy an additional €2.7 billion of Greek government bonds and cover a €3.3 billion withdrawal by domestic private depositors.

A key component of the Greek rescue plan agreed yesterday was the confirmation by ECB President Trichet that the central bank will continue to accept collateral rated down to BBB- in its lending operations beyond year-end. This represents a defeat for Bundesbank-led ECB hawks who wanted to return the minimum rating to its pre-crisis level of A-, thereby cutting Greece adrift in the event of Moody's downgrading its rating to match S&P and Fitch, both at BBB+.

The success of the plan may hinge on whether it stems the incipient run on Greek banks. Private deposits have fallen by €8.4 billion, or 3.5%, since December as EMU exit worries have mounted – second chart. The Bundesbankers may have been forced to agree to keep Greece's life support switched on in return for IMF participation in the rescue deal but could baulk if backdoor lending continues to balloon.

The Budget was low-key and does not meet its aim of placing the UK on a "credible path of fiscal consolidation". The projected fall in borrowing over the medium term continues to rest on optimistic economic and financial assumptions and an absence of detail about future spending cuts.

The Chancellor has been able to create the illusion of fiscal progress by revising up excessively-pessimistic revenue projections presented in the April 2009 Budget and carried over to December's Pre-Budget Report (PBR). Net taxes and national insurance contributions are now forecast at 33.9% of GDP in 2009-10 versus 33.2% in the PBR. This explains the cut in public net borrowing from 12.6% of GDP to 11.8%.

The revenue "windfall" carries over to future years, accounting for the cut in the 2014-15 borrowing projection from 4.4% of GDP in the PBR to 4.0%.

Projections for spending, by contrast, are little changed. Total managed expenditure (TME) is forecast to fall from 47.9% of GDP in 2009-10 to 42.3% in 2014-15. The 5.6 percentage point decline over five years is ambitious but not unachievable – TME fell from 47.8% of GDP to 38.9% between 1983-84 and 1988-89. The Chancellor, however, provided no new information on the departmental distribution of cuts. Capital spending will be a major casualty, falling from 4.9% of GDP in 2009-10 to 2.6% by 2014-15, at odds with the claim that the Budget is designed to support investment.

The forecasts for debt interest continue to look optimistic. Net interest is projected to rise from 1.9% of GDP in 2009-10 to 3.3% by 2014-15. The latter figure, however, implies an average interest rate on net debt of only 4.4%, effectively assuming away any future funding difficulties. Each one percentage point rise in the average interest cost would boost the 2014-15 net interest bill by 0.7% of GDP.

The various Budget measures were designed to attract headlines but are insignificant in macroeconomic terms. A net "giveaway" of £1.4 billion in 2010-11 is offset by tax changes yielding £150 million and £705 million in 2011-12 and 2012-13.

The Debt Management Office projects that net gilt sales (i.e. gross sales minus redemptions) will fall from £211 billion in 2009-10 to £148 billion in 2010-11 – a smaller decline than expected, reflecting a cut in Treasury bill financing from £19 billion to -£2 billion. Assuming no further Bank of England buying, the supply of gilts to be absorbed by the market will rise from £28 billion this year to the full £148 billion in 2010-11 – well above the previous record of £110 billion in 2008-09.

Consumer price inflation fell from an annual 3.5% in January to 3.0% in February but this is unlikely to mark the beginning of a sustained decline to about 1% by early 2011, as forecast by the Bank of England in the February Inflation Report.

A return to 3% was predicted in a post last month and reflected a fall in food and energy inflation together with a large monthly rise in "core" prices in February 2009 dropping out of the annual comparison. A further decline, however, is unlikely near term: monthly core price increases were low over March-June 2009 while energy inflation should rebound as a result of higher petrol prices and cuts in household bills last spring falling out of the calculation.

Assuming no significant impact from Budget decisions, CPI inflation is projected to fluctuate in a 3.0-3.25% range until mid-year before declining modestly during the second half, remaining well above the 2% target.

Services inflation has exerted downward pressure on the headline rate over the past year, falling from an annual 4.6% in December 2008 to 3.0% in February. The decline, however, may be coming to an end as the economy recovers: the balance of consumer services companies planning to raise prices has increased sharply, according to the first-quarter CBI / Grant Thornton survey released earlier this month – see first chart.

Goods inflation excluding food and energy, meanwhile, eased from an annual 3.3% to 2.6% in February but will be underpinned by recent exchange rate weakness and pass-through of surging raw material costs – sterling commodity prices, as measured by the Journal of Commerce industrials index, are two-thirds higher than a year ago. The balance of CBI manufacturing firms planning to hike prices rose to an 18-month high in March and is above its long-run average – second chart.

The February headline rate of 3.0% compares with the Bank of England's forecast a year ago that inflation would average 1.3% in the first quarter of 2010. The Bank has failed to provide a coherent explanation for its forecasting miss and markets appear to be increasingly sceptical of its inflation-fighting commitment, judging from a widening yield gap between conventional and index-linked gilts – third chart.

British banks’ profits should rise strongly over 2010-12 as impairment charges fall, suggesting that tax-payers will gain from their stakes in Lloyds Banking Group, the Royal Bank of Scotland (RBS), Northern Rock and Bradford & Bingley lending.

British banks in aggregate lost £2 billion in 2009, according to recently-released annual results. Underlying net income rose to a record £51 billion – the prior peak was £42 billion in 2007 – but was outweighed by impairment charges of £53 billion*.

Impairments, however, fell by 19% between the first and second halves and should continue to decline steadily – assuming no “double-dip” recession. Guidance about their trajectory is provided by bad debt experience in the early 1980s and early 1990s, associated with the 1979-81 and 1990-91 recessions. Impairments totalled 4.7% of “assets at risk” over the five years 1982-86 and 7.1% over 1989-1993.  The first chart shows projections based on losses over 2008-2012 falling within this range – low real interest rates suggest that higher numbers are unlikely. From £53 billion in 2009, impairments are forecast to fall to £30-40 billion in 2010, £15-32 billion in 2011 and £8-25 billion in 2012.

On the conservative assumption of no further increase in underlying net income from its 2009 level of £51 billion, this would imply a recovery in profits after charges to £11-22 billion in 2010, £19-36 billion in 2011 and £26-43 billion in 2012. In other words, profits could surpass their 2007 peak of £31 billion as early as 2011 – second chart.

Lloyds and RBS lost a combined £13 billion last year, with underlying net income of £27 billion offset by £40 billion of impairments. If charges fall in line with the industry average, and the underlying surplus is stable, the two banks could earn profits of £8-21 billion in 2012. Taking the mid-range figure of £14.5 billion and applying a corporation tax rate of 28% and a price/earnings ratio of 10, the equity of the two banks could be valued at about £104 billion in 2012, up from £65 billion at Friday's close. (The P/E of UK banks averaged 10.8 between 1965 and 2009, according to Thomson Datastream.) Assuming no change in equity outstanding, this would be consistent with share prices of 96 pence for Lloyds and 71 pence for RBS versus 60p and 44p respectively on Friday, implying a paper profit on tax-payers' stakes of about £25 billion. (The National Audit Office has estimated average in-prices of 50p for RBS and 74p for Lloyds, with each 10 pence increase boosting the value of the stakes by £9 billion and £3 billion respectively.)

* These numbers cover the main high-street banking groups: Santander UK, Barclays, Bradford & Bingley lending, HSBC Bank (the UK subsidiary of HSBC), Lloyds Banking Group, Northern Rock and RBS.