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UK economic outlook downgraded to ‘negative’ by ratings agency | Moody’s

By on October 22, 2022 0

The UK’s economic outlook has been downgraded from ‘stable’ to ‘negative’ by ratings agency Moody’s due to political instability and high inflation.

Moody’s said the change in outlook was driven by “increased unpredictability in policy-making amid weaker growth prospects and high inflation” and “risks to the Kingdom’s debt affordability. United States due to likely higher borrowing and the risk of a lasting weakening of political credibility”.

Rating agencies rate a country on the strength of its economy and assign governments a rating based on the likelihood that they will be able to repay their debt.

The rating affects how much it costs governments to borrow money in international financial markets. According to the agency, a forecast period “generally lasts 12 to 18 months”.

However, while the UK’s economic outlook has been described as ‘negative’, Moody’s credit rating for the UK remains unchanged at Aa3.

The agency said the rating reflects the UK’s economic resilience “despite the weakening of fiscal policy predictability in recent years”.

He added: “The country’s longstanding institutional framework remains strong and will continue to support the UK’s ability to respond to shocks, as seen during the pandemic. Furthermore, the structure of UK public debt, with a very long average maturity of around 15 years, as well as a deep domestic investor base add a degree of resilience to the credit profile in the face of shocks.

“The UK’s local and foreign currency country caps remain unchanged at Aaa. The three-notch gap between the local currency ceiling and the sovereign rating is due to the government’s relatively small footprint in the economy, a fairly robust external payments position and a diversified economy.

Chancellor Jeremy Hunt has pledged to do ‘whatever is necessary’ to bring down public debt after official figures revealed borrowing hit £20billion in September.

The Office for National Statistics (ONS) has reported that a rise in debt interest has increased borrowing beyond economists’ expectations, laying bare the challenge facing the Chancellor and new Prime Minister ahead of the fiscal event at the end of this month.

The latest borrowing reading, excluding public banks, marked the second highest September on record, surpassed only at the height of the Covid-19 pandemic, the ONS said.

Borrowing in September beat economists’ forecasts, which had predicted £17bn for the month, and was significantly higher than the £14.8bn estimated by the Office for Budget Responsibility (OBR) in March.

Hunt said: “Strong public finances are the foundation of a strong economy. To stabilize the markets, I have been clear that protecting our public finances means that tough decisions lie ahead.

“We will do whatever is necessary to reduce debt over the medium term and ensure that taxpayers’ money is well spent, putting public finances on a sustainable path as we grow the economy.”

The newly appointed Chancellor has already reversed a number of key financial policies announced last month by his predecessor Kwasi Kwarteng, including plans to scrap the 25% corporation tax increase.

The latest data from the ONS revealed that the increase in borrowing was due to £7.7billion in debt interest payments for the month, reflecting a £2.5billion increase on the same month in 2021.

It was the highest interest rate in September since records began in 1997.

Significantly higher debt interest payments linked to retail price index (RPI) inflation drove the increase, the ONS said.