UK financial services companies may cut fewer jobs than forecast as the government’s bailout of the banking system and interest rate cuts restore confidence, according to the Centre for Economics & Business Research. 

Banks and insurers in London may eliminate about 29,000 jobs this year, 9 percent of the total, before employment growth resumes in 2010, the CEBR said in a report today. The estimated losses are lower than the firm’s October forecast of 34,000.

“The financial crisis has turned the corner,” the CEBR said. “The bank recapitalization, asset protection scheme and sharp cut in interest rates have all helped to restore confidence in financial markets.”

The government took control of Royal Bank of Scotland and Lloyds Banking Group this year, and extended state guarantees to cover the lenders’ riskiest assets in a bid to revive lending and growth. The economy shrank 1.6 per cent in the fourth quarter, the most since 1980, and the Organization for Economic Cooperation and Development forecasts gross domestic product to drop 3.7 per cent this year.

“We are beginning to see light at the end of the tunnel,” CEBR senior economist Richard Snook said. “There will be further serious job losses as a result of the credit crunch, but we expect this to be a one-off adjustment to the sector.”

Bankers specializing in mergers and acquisitions may be among the worst-hit as half of all corporate-finance jobs are likely to disappear amid a dearth of takeovers. The number of jobs in derivatives is likely to shrink by 40 per cent as demand for “complex” products evaporates, the CEBR said.

Overall, the number of jobs in the City, London’s main financial district, will tumble to 295,000 in 2009 after 28,000 job losses in the industry last year. Employment levels may start to recover in 2010, and reach 313,000 in 2012.