Following the downgrading of the UK’s government bond rating from ‘AAA’ to AA1′ Schroders European Economist, Azad Zangana, commented yesterday that it was ‘no surprise’.

The downgrading has come a year after sluggish growth had turned the outlook for the rating was changed to negative, with the economy double-dipping in 2012 and the possibility of a triple-dip recession on the cards.

Moody’s cited three key factors behind its downgrade:

  1. The continued weakness in the UK’s medium-term growth outlook.
  2. The implications of weak medium-term growth for the UK’s public finances, leading to higher debt.
  3. The deterioration in the UK’s ability to absorb future shocks using the government’s balance sheet.

Moody’s did however revise up its rating outlook back to stable, indicating that the UK would not be downgraded further.

Zangana stated: ‘Overall, this downgrade had been on the cards for some time, and the market reaction this morning suggests there are bigger concerns out there for investors, such as the elections in Italy for example.

‘Both Standard and Poor’s and Fitch also have the UK’s outlook on negative watch, and so we expect the others to follow suit. This could push some investors that are forced to hold ‘AAA’ rated assets to sell out of gilts, however, in a world where the pool of ‘AAA’ rated assets is shrinking, we do not expect to see much of an impact.’

He concludes that the fallout of the downgrade is more likely to be felt in Westminster rather than the City, where Chancellor George Osborne has used the ‘AAA’ rating as a benchmark for economic competence.

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