Credit test

Moody’s lowers UK’s outlook to ‘negative’

London and financial services
Borrowing costs will rise if the rating is downgraded

The UK’s battered international image has suffered another blow after its financial and economic outlook was revised from “stable” to “negative” by ratings agency Moody’s.

The agency attributed the change to “heightened unpredictability in policymaking amid weaker growth prospects and high inflation.”

It said there were “risks to the UK’s debt affordability from likely higher borrowing and risk of a sustained weakening in policy credibility.”

The rating’s agency said it viewed the government’s mini-budget, the reversal of the majority of the policies in it, and the change in Prime Minister as a “continuing reflection of the weakening predictability of fiscal policymaking seen in previous years”.

The change to the UK’s outlook does not mean its credit rating has been downgraded – a reflection of its continued economic resilience – but a negative outlook indicates it could be downgraded at some point.

This would drive up borrowing costs for the government, add pressure to public spending, and weaken investor appetite for UK assets.

The last time Moody’s downgraded the United Kingdom’s credit rating was in October 2020, citing lower than expected growth following Brexit, rising government debt and a weakening of the UK’s institutions that it said had led to a “fractious policy environment.”

Moody’s latest assessment comes after government borrowing costs rose sharply following the mini-budget on 23 September when investors became spooked by the then Chancellor Kwasi Kwarteng pledging huge tax cuts without saying how the government would pay for them.

Last Monday the new Chancellor, Jeremy Hunt, reversed the majority of those tax cuts in an attempt to calm the markets.

The resignation of Prime Minister Liz Truss means all bets are off, though it is unlikely there will be any further major revisions under her successor, particularly as Mr Hunt is expected to stay in post.

However, his attempts to ease pressure on government finances are far from over over as borrowing costs rose on Friday, while the pound sank as investors reacted to gloomy economic data.

The interest rate – or yield – on bonds due to be repaid in 30 years’ time rose back above 4%, making government borrowing more expensive. Yields hit 5.17% in the immediate aftermath of the mini-budget.

The yield on bonds due to be repaid in five years’ time, which underpins the cost of new five-year fixed rate mortgages, rose to 4.09%.

Comment: People power is no match for the markets – why a general election would be a bad move

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