Status: 06.10.2022 12:45
Despite the UK government’s turnaround in fiscal policy, rating agency Fitch now warns of a credit rating downgrade. The consequences for Britain would be unpleasant.
Rating agency Fitch has lowered the UK’s credit rating outlook from “stable” to “negative”. The long-term foreign currency bond rating will initially remain at “AA-“, credit rating officials announced Wednesday evening.
This means that the UK is threatened with a downgrade of its credit rating in the near future. This would mean that Fitch rates the loan default risk higher. The consequence would be that the UK would have to pay higher interest rates in the financial markets to borrow money. Financial market players, such as banks, institutional investors, funds and private investors, are compensated for their increased risk of default with higher interest rates.
The other two major rating agencies S&P and Moody’s have also expressed criticism of the government’s economic performance in recent days. S&P also announced a credit rating downgrade.
Kwasi Karteng goes back
A few hours before Fitch’s decision, Prime Minister Liz Truss, who was also under pressure within her party, defended her fiscal policy course in a speech at the Conservative Tories party conference in Birmingham. The goal is economic “growth, growth, growth”.
The new UK finance minister, Kwasi Kwarteng, had previously overturned the abolition of the top 45% income tax rate. This point in particular had aroused harsh criticism from his own party.
Still no recession
Britain is currently suffering from the worst economic crisis in decades and high inflation. Electricity and gas prices for consumers are likely to rise by 80% in October and many companies are on the verge of collapse due to high energy costs.
The country recently narrowly avoided a recession: according to the national statistics office, the economy grew 0.2 percent in the second quarter. Previously, it was assumed that gross domestic product (GDP) would decline by 0.1 percent over this period.
The whole package of tax cuts had caused turmoil in the financial markets: the British pound had fallen to an all-time low against the dollar and the bond market had also collapsed. Due to the turmoil, the UK central bank felt compelled to intervene in the domestic bond market. It has since repurchased government bonds.
An increase in debt is expected
Truss did not convince the rating agency, because Fitch continued to cite the government’s financial policy in London as justification: “The large and unfunded financial package that was announced as part of the new government’s growth plan could lead to to a significant increase in the deficit in the medium term ”.
Fitch also justified the step by stating that the new Prime Minister’s room for maneuver could be limited by his Conservative Party’s decline in popularity, the aftermath of the inflationary crisis, and other factors.
The British pound is recovering
Investors and market experts also remained skeptical. The S&P rating agency is sticking to its critical assessment: the reversal has no significant impact on the material reasons for the decision to issue a downgrade notice for Britain’s AA rating.
Jane Foley, a financial market expert at Rabobank, said it would only be clear if the government did enough when the Bank of England intervention ended on October 14. British assets, sterling and government bonds are not out of the woods yet, she said. On the financial markets, on the other hand, the pound has now recovered from its lows.
