Moody’s took the decision late on Friday to drop the UK credit rating from the highest possible rating of AAA to Aa1, because it said the outlook for the economy was “sluggish”.
When making their decision Moody’s said,
“challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament”
“The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy,”
Chancellor George Osborne put a positive spin it on by saying,
“Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it,”
“We will go on delivering the plan that has cut the deficit by a quarter.”
However today the City didn’t show signs if reacting to the credit rating downgrade as the FTSE gained 29.39 points, while the Pound remained $1.51 higher on the dollar.
The Pound did however fall to a 16-month low against the Euro but CMC Markets analyst Michael Hewson said this was not because of the downgrade, he said,
“It’s not the downgrade which is hurting sterling,”
“Markets will be more interested in tomorrow’s quarterly BoE inflation report … with speculation rising that the Bank may well cut its growth forecast once again, raising the prospect of further sterling weakness,”
While Business Secretary Vince Cable brushed off the downgrade by saying,
“In terms of the real economy, there is no reason why the downgrade should have any impact… these things do not necessarily affect the real economy but they do reflect the fact that we are going through a very difficult time,”
Over the previous quarter the UK has been getting stronger with many financial analysts predicting it would avoid a triple dip recession.
It’s unclear how much of a set back the downgrade will have on the recovery of the UK economy but it’s positive that markets haven’t seen much reaction so far.