Britain’s economic outlook lowered to ‘negative’, says Moody’s

Moody’s kept UK’s credit rating at Aa3

Britain’s economic outlook has been dropped from “stable” to “negative” due to heightened political unpredictability and high inflation, ratings agency Moody’s has said.

The rating is used to consider the strenth of a country’s economy based on how likely it is to pay back debt, which in turn affects how much it costs governments to borrow money in the international financial markets.

Agencies also give nations a credit rating score, which ranges from AAA, or “prime”, to “D”, which represents “default”.

Though Moody’s kept Britain’s credit rating at Aa3, the fourth-hightest level on its ratings scale, it pointed out there were “risks to the UK’s debt affordability”.

The agency noted two “drivers” behind its decision lower the country’s economic outlook to negative.

“The increased risk to the UK’s credit profile from the heightened unpredictability in policymaking amid a volatile domestic political landscape,” was the first reason given.

This unpredictability, Moody’s said, posed a challenge to Britain’s “ability to manage the shock arising from weaker growth prospects and high inflation”.

It cited Liz Truss and Kwasi Kwarteng’s disastrous mini-Budget, the U-turning on many of its proposals and the short-lived tenure of the now outgoing PM as a “continuing reflection of the weakening predictability of fiscal policymaking seen in previous years”.

The bleak asssesment comes after government borrowing costs were sent soaring by the September mini-Budget, the sweeping, uncosted tax cuts of which spooked the markets.

Following Mr Kwarteng’s sacking from the Treasury, his successor Jeremy Hunt reversed the bulk of his tax cuts in a bid to temper the City’s reaction. But, as the markets now sit in wait for a replacement for Ms Truss in No 10, the UK’s economic policy-making has been shelved.

“The government’s initial inability to deliver a credible policy response to address investor concerns around this unfunded stimulus further weakened the UK’s policy credibility, which is unlikely to be fully restored by the subsequent decision to reverse most of the tax cuts,” Moody’s said.

The ratings agency said the second driver of its decision was the “heightened risks to the UK’s debt affordability from likely higher borrowing and the risk of more persistent inflation”.

On Friday, government borrowing costs rose in tandem with another slump in the value of the pound.

The rise in borrowing is due to the yield on bonds due to be repaid in 30 years’ time rising back above 4 per cent.

In addition, the yield on bonds due to be repaid in five years’ time, which determine the cost of new five-year fixe-rate mortgages, rose to 4.09 per cent.