Author Ben Leonard
One of the top credit ratings agency, Moody’s, has downgraded the UK’s credit rating in the wake of Brexit fears.
Back in July, Moody’s announced that they were considering reducing the UK’s credit rating score, and it now looks like they have followed through with their suggestions.
A rating downgrade can affect how much it costs governments to borrow money in the international financial markets. In theory, a high credit rating means a lower interest rate (and vice versa).
Moody’s was the first credit ratings agency to downgrade the UK back in 2016, when they reduced the UK from an AAA rating – the highest possible – to an AA1.
And now Moody’s have revisited the credit rating for the UK and downgraded again, to AA2.
In their statement, the credit ratings agency said that the reason for this downgrading was “partly in response to the looming prospect of the UK’s access to the European Union’s single market and customs union being reduced.”
However, they also added that they thought that the approach the current government was taking in relation to public finances was “increasingly in questions”, adding that they thought the debt burden will likely rise in future.
Britain has actually managed to cut their budget deficit drastically in the past 7 years, as a result of extreme austerity cuts from the Conservative government. In 2010, the budget deficit was roughly 10% of economic output, whereas now the budget deficit sits around 2.3% in the 2016/2017 fiscal year.
However, this is expected to rise following a period of declining household incomes.
Moody’s also added that they expect “the budget deficit to remain at 3% to 3.5% of GDP in coming years against the government’s plan of a gradual reduction to below 1% in 2021/22,”
The Treasury hits back
However, the Treasury soon hit back, accusing the credit ratings agency of having an “outdated” outlook.
“The assessments made about Brexit in this report are outdated. The prime minister has just set out an ambitious vision for the UK’s future relationship with the EU, making clear that both sides will benefit from a new and unique partnership.” the Treasury said in a statement, following the Prime Minister’s speech about Brexit in Florence.
They also added that they “have made substantial progress in reducing the deficit while finding extra money for the NHS and social care at the same time.”
Signs of more to come?
This could be a sign of further downgradings from other credit agencies, however. Moody’s was the first agency to downgrade Britain of its top-tier AAA rating in 2016, with other agencies quickly following suit.
Along with the downgrade to the UK’s sovereign rating, Moody’s also cut its rating on the Bank of England to Aa2 from Aa1.
However, Moody’s did also recently change the UK’s long-term issuer and debt ratings from “negative” to “stable”, meaning that they do not anticipate any other changes to the UK’s ratings in the near future.