The pound slipped to a two-year nadir as news that Moody's Investor service became the first ratings agency to downgrade the UK from its triple A score since 1978. Domestic and foreign-currency government bond ratings have had their scored lowered to an AA1, though the outlook on these ratings remains stable.
In a statement the ratings agency cited the UK's weak medium-term growth prospects as the main reason behind the downgrade, though the high and rising debt burden was also mentioned. “The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade,” read the statement. “And, as a consequence of the UK's high and rising debt burden, a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016.”
However, Moody's was keen to emphasise the country's creditworthiness remained high at AA1, “because of the country's significant credit strengths,” according to the statement. “These include a highly competitive, well-diversified economy; a strong track record of fiscal consolidation and a robust institutional structure; and a favourable debt structure, with supportive domestic demand for government debt, the longest average maturity structure of 15 years among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.”
In the wake of the announcement the sterling dropped to its lowest level since the summer of 2010, against the dollar, but stabilised soon afterwards. Analysts have suggested that a weaker pound might be beneficial for the British economy as exports will become more competitive, though inflation is likely to increase as a result of the weak currency.
The British Chancellor George Osborne has tried to remain positive about the downgrade, referring to It as a “stark reminder of the debt problems facing our country.
“Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it,” he said. “We will go on delivering the plan that has cut the deficit by a quarter.”