Moody’s lowers UK’s outlook to negative


London
CNN Business

Moody’s Investor Service changed the outlook on the UK government’s ratings to “negative” from “stable” on Friday.

Moody’s attributed the change in outlook to “greater unpredictability in policymaking amid weaker growth prospects and high inflation; and risks to UK debt affordability from likely further borrowing and the risk of a sustained weakening in policy credibility.”

However, the rating agency affirmed the country’s credit rating. The affirmation of the Aa3 rating is a reflection of the UK’s economic resilience, Moody’s said in a statement.

Credit ratings are essentially credit ratings for governments and businesses. They express an opinion about the ability and willingness of large borrowers to repay their debts. Germany, Canada, Switzerland, Australia, and the United States have some of the best credit ratings in the world, while Argentina, Nigeria, Pakistan, and India have some of the lowest ratings.

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The United Kingdom is suffering a series of shocks to its economy, which according to the Bank of England could already be in recession. Rising food costs pushed the annual rate of inflation to 10.1% in September, bringing it back to a 40-year high in July.

That may prompt the central bank raise interest rates more aggressively when it meets on November 3 to rein in rising prices.

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On Thursday, Liz Truss resigned as Prime Minister after a disastrous six weeks in office. The “mini” budget of Truss and former Finance Minister Kwasi Kwarteng sent shock waves through UK financial markets. Investors immediately rejected his plans for unfunded tax cuts, boosting government bond yields, sinking the pound and forcing the Bank of England to make three successive interventions to bail out overstretched pension funds.

While most of those measures have since been rescinded by Britain’s new finance minister, Jeremy Hunt, calming markets and restoring a sense of stability, the government’s credibility has been damaged and volatility could persist.

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In addition to increasing borrowing costs for the government and adding pressure to public spending, any downgrade in credit ratings it will only weaken investors’ appetite for UK assets.

The last time Moody’s downgraded the UK’s credit rating in October 2020, citing lower-than-expected growth after Brexit, rising public debt and a weakening of UK institutions that it said had led to a “political environment troubled”.

— Julia Horowitz and Alicia Wallace contributed to this report.

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