New fears for pound after UK's credit rating drops

Sterling is expected to come under pressure tomorrow following the loss of Britain's gold-plated AAA credit rating.

The pound fell late on Friday after ratings agency Moody's downgraded the country to AA1 - warning sluggish growth would continue for years.

The UK currency has already come under significant pressure this year amid mounting fears of a downgrade as growth and public borrowing figures continue to disappoint.- falling about 7% against the US dollar to 1.51 US dollars.

It has also fallen strongly against the euro to 1.15 as the UK's deepening economic woes contrast with increasing optimism in the eurozone and hopes the single currency will survive after the European Central Bank launched its bond-buying rescue plan.

Howard Archer, chief UK and European economist at IHS Global, said the pound would be "particularly vulnerable" after the downgrade, but said the markets had been increasingly pricing in the AAA rating loss for some time.

But the Federation of European Employers warned that Moody's decision could have a profound impact on the City of London as one of the world's top financial centres.

Secretary-general Robin Charter said: "The downgrading of the UK's credit status is a blow for the UK as a leading financial centre and the UK balance of payments is so reliant on its financial services that even a small loss in trading income could affect the value of sterling and have a major impact on GDP."

Gerard Lane, analyst at Shore Capital, said the credit rating reflected reality and that sterling needed to fall to parity against the euro and to 1.35 against the US dollar in order to rebalance the UK economy.

He said sterling needed to fall to "bring reality to bear on the UK consumer that we as a country - and we collectively as a consumer - are not as rich as we think we are". He said it would give exporters a chance to grow, given the need to replace oil exports, which in turn should be a source of jobs.

But business groups have warned that urgent action to get the economy moving again is needed in the Budget next month in the wake of the downgrade.

John Longworth, director general of the British Chambers of Commerce (BCC), warned that the Prime Minister and the Chancellor would have to look into more radical measures in the next six months, to stimulate exports, generate infrastructure development and create a business finance environment which favours enterprise and growth.

He said: "The fact that the ratings spell has been broken allows the Chancellor to be braver on growth, provided the growth stimulus sought reflects market sentiment."

But Ben Thompson, managing director of the Legal & General Mortgage Club, said markets would have expected the downgrade to a certain degree and there would not be too much disruption to the cost of funding.

He said plans such as the Government's Funding for Lending Scheme - which sees the Bank of England provide cheap money to the banks - should mean cheap funds were at the ready and mortgage pricing should continue to remain low.

PA