Moody’s Investor Service on Friday changed its outlook for the UK government’s rating from “negative” to “stable”.
Moody’s attributed the change in outlook to “increasing policy uncertainty amid weaker growth prospects and high inflation; and risks to the UK’s debt service due to higher borrowing and the risk of continued weakening of policy credibility”.
However, the rating agency affirmed the country’s credit rating. The confirmation of the Aa3 rating is a reflection of the UK’s economic resilience, Moody’s said in a statement.
Credit ratings are basically credit scores from governments and businesses. They express their opinion about their ability and willingness to repay the debts of large borrowers. 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.
The UK is suffering a series of blows to its economy, and the Bank of England has said it may already be in recession. Rising food costs pushed the annual inflation rate to 10.1% in September, returning to July’s 40-year high.
This could boost the central bank to raise interest rates more aggressively when it meets on November 3rd to withstand rising prices.
On Thursday, Liz Truss resigned as Prime Minister after six disastrous weeks in office. Truss and former finance minister Kwasi Kwarteng’s “mini” budget rocked UK financial markets. Investors immediately rejected plans for unfunded tax cuts, sending government bond yields soaring, sinking the pound and forcing the Bank of England to make three successive interventions to rescue pension funds.
While most of these measures have since been lifted by Britain’s new Chancellor of the Exchequer Jeremy Hunt – calming markets and restoring a sense of stability – the government’s credibility has been damaged and volatility may persist.
In addition to raising the government’s borrowing costs and adding pressure to public spending, the credit rating would be downgraded. It has only weakened investor appetite for UK assets.
For the last time Moody’s downgraded the UK’s credit rating in October 2020, citing lower-than-expected post-Brexit growth, rising government debt and weakening UK institutions leading to a “turbulent policy environment”.
— Julia Horowitz and Alicia Wallace contributed to this report.