Moody’s lifts UK’s outlook to ‘stable’ on restoration of policy predictability

(Reuters) -Ratings agency Moody’s revised Britain’s outlook to “stable” from “negative” on Friday, saying policy predictability has been restored after heightened volatility last year around the so-called “mini-budget” under then-Prime Minister Liz Truss.

Moody’s last changed its outlook on Britain one year ago, when Truss had spooked markets with unfunded tax pledges, culminating in her resignation.

Her replacement as Prime Minister, Rishi Sunak, reversed those policy decisions and pledged to restore Britain’s economic stability and fix her mistakes when he took office last October.

“Policy predictability has been restored after heightened volatility last year around the mini-budget,” the ratings agency said, affirming the country’s rating at “Aa3”.

“While structural spending pressures and relatively high inflation will pose risks to the government’s ability to fully deliver on its fiscal plans, Moody’s still expects fiscal policy to gradually tighten over the coming years.”

British inflation, at 6.7% in the year to September, is the highest of any major advanced economy and last week the International Monetary Fund forecast its economy would grow just 0.5% next year, the weakest in the Group of Seven.

The government borrowed 81.7 billion pounds ($99.35 billion) in the first half of the 2023/24 financial year, 15.3 billion pounds more than between April and September 2022, but about 20 billion pounds less than the government forecast in March.

Britain’s Office for Budget Responsibility (OBR), which is in charge of the forecasts, said tax revenue had been higher in cash terms due to faster than expected inflation and pay growth.

However, finance minister Jeremy Hunt has said the better budget outcome does not allow scope for the tax cuts which many in his Conservative Party want to boost their standings in the wake of recent electoral defeats.

Hunt said on Sunday that Britain’s debt servicing costs were likely to rise by 20 billion to 30 billion pounds a year due to higher interest rates, and described the increase in borrowing costs as “clearly not sustainable”.

Hunt is due to give a fiscal update on Nov. 22.

Standard and Poor’s had already revised up its outlook for Britain’s sovereign credit rating in April, removing the “negative” label they applied after Truss’s mini-budget.

On Friday S&P affirmed its AA rating and stable outlook for Britain.

($1 = 0.8224 pounds)

(Reporting by Aatrayee Chatterjee in Bengaluru and David Milliken and Alistair Smout in London; Editing by Shailesh Kuber and Daniel Wallis)