Credit ratings agency Moody's has downgraded the outlook for the UK government and the Bank of England from ‘stable' to ‘negative' amid the political and economic turmoil in the wake of the Mini Budget.
Moody's said the change in outlook was driven by "heightened unpredictability in policymaking amid weaker growth prospects and high inflation" and "risks to the UK's debt affordability from likely higher borrowing and risk of a sustained weakening in policy credibility", reports Investment Week.
The agency noted that the so-called 'Mini Budget', together with the subsequent reversal of most of the measures announced and the forthcoming change in prime minister, is a "continuing reflection of the weakening predictability of fiscal policymaking" seen in previous years.
The report said: "Overall, the episode illustrates the increasing polarisation and unpredictability of the domestic political environment, which may undermine efforts to deliver on fiscal consolidation amid likely demands to further alleviate cost of living pressures."
The decision to change the outlook to negative was also driven by the heightened risks to the UK's debt affordability from likely higher borrowing and the risk of more persistent inflation, the agency said.
A sustained erosion of the UK's policy credibility could also lead to higher borrowing costs in the medium term, it added.
"The prospect of higher borrowing, more persistent inflation, and a more significant tightening in monetary policy leading to higher funding costs has increased risks to the UK's debt affordability over the medium term," Moody's said.
"Weakening debt affordability would be of heightened significance for the UK's fiscal strength given sterling's status as a reserve currency."
However, Moody's credit rating for the UK remains unchanged at Aa3. The agency said this rating reflects the UK's economic resilience "despite the weakening in fiscal policy predictability in recent years".
"The country's longstanding institutional framework remains strong and will continue to support the UK's ability to respond to shocks, as seen during the pandemic," the agency said.
"Furthermore, the structure of the UK government debt, with a very long average maturity of around 15 years, as well as a deep domestic investor base adds a degree of resilience to the credit profile in the face of shocks."
This comes a few weeks after a similar move by the S&P and Fitch Ratings, which also downgraded the nation's outlook from ‘stable' to ‘negative'. Both maintained their investment grade credit rating, however.
