After S&P, Fitch downgrades the outlook for the UK rating

Written October 6, 2022 at 07.09Updated on October 6, 2022 at 11:09

Another severe weather warning for the UK economy. Less than a week after S&P, ratings agency Fitch on Wednesday evening lowered the outlook for Britain’s rating from “stable” to “negative”.

If Fitch has maintained its UK sovereign debt rating at AA-, one notch below S&P’s, it may just be a respite. Wednesday’s decision signals the risk of a downgrade of this rating if the country’s economic situation does not improve.

Risk of a “significant” increase in deficit

For the two agencies, the motivations are identical: they are due to the large tax cuts announced by the British government on 23 September. These measures taken to boost growth “could lead to a significant increase in budget deficits over the medium term,” Fitch said in its press release.

And to drive home the point by adding that the budget package was “announced without compensatory measures or independent assessment of its impact on public finances, and the mismatch between fiscal and monetary policy, given the strong inflationary pressures, has had negative consequences for confidence in financial markets and the credibility of the political framework”.

And the reversal at the beginning of the week with the announcement of the cancellation of the tax relief for the richest has not changed the situation. In fact, the lack of figures on the size of the mega-budget package and projections on the impact of this massive spending plan – without planned spending cuts and with debt financing at a time when inflation is soaring and interest rates are rising – are unsettling the financial markets. on fire last week.

Liz Truss vows to get country ‘out of the storm’

While the pound fell to an all-time low on September 26, long-term UK government interest rates rose sharply, making the financing of UK debt more expensive. A serious handicap when inflation rises to almost 10%, the highest in the G7, and when London wants to borrow much more.

The rating agencies’ lack of confidence certainly does not sit well with Liz Truss, who is already weakened after a short month in power. And even as she sought to regain the upper hand on Wednesday by pledging, at the end of a Conservative congress marred by doubt and discord, to get Britain out of the “storm” thanks to growth.

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