UK Outlook Raised to Stable by Moody’s in Win for Sunak

Moody’s Investors Service removed its negative credit outlook on the UK, while Standard & Poor’s maintained a stable outlook, in a much-needed boost for Prime Minister Rishi Sunak.

(Bloomberg) — Moody’s Investors Service removed its negative credit outlook on the UK, while Standard & Poor’s maintained a stable outlook, in a much-needed boost for Prime Minister Rishi Sunak.

The credit assessors indicated Britain is not at risk of losing its rating, which is AA at S&P, the third-highest level, and Aa3 at Moody’s, the fourth-highest.

“Policy predictability has been restored,” Moody’s said in a statement Friday, while S&P cited a “resilient economic performance despite multiple headwinds.”

The verdicts offer some relief for Sunak in a week his Conservative Party suffered heavy defeats to the opposition Labour Party in two special elections in England. 

The loss of huge Tory majorities in Mid Bedfordshire, north of London, and Tamworth, a rural area in northwest England, reinforced speculation that Labour is on track to return to power for the first time in 14 years in a general election expected sometime in 2024. 

Speculation about a possible UK downgrade has been rife since August, when Fitch Ratings stripped the US of its top-tier score, citing a rising debt burden and an “erosion of governance.”

In the UK, the fiscal outlook has deteriorated since the spring. Government debt is close to 100% of GDP, its highest level since the early 1960s, and higher interest rates are adding tens of billions to the future cost of servicing the UK’s £2.6 trillion debt pile.

There are growing fears that the UK may already be in recession as a jump in mortgage rates piles further pressure on households after the worst cost-of-living crisis in decades.

However, Moody’s opted to reverse the decision it made a year ago, when it cut its outlook on the UK to negative from stable in the wake of the market and political turmoil triggered by then-Prime Minister Liz Truss’s unfunded tax cuts.

The decision reflects the view “that policy predictability has been restored after heightened volatility last year around the mini-budget,” Moody’s said in a statement. “The UK’s institutions will continue to operate in effective and predictable ways and, together with a commitment to fiscal consolidation by the government, will deliver effective fiscal policy.”

S&P suggested there was no case for changing the assessment it made in April, when it raised its outlook on the UK to stable from negative. 

At that time, S&P praised Sunak and Chancellor Jeremy Hunt for steadying the public finances following the market and political turmoil triggered by the massive unfunded tax-cutting plans announced by their predecessors. 

“The stable outlook reflects the U.K.’s resilient economic performance despite multiple headwinds, as well as our expectation that general government deficits will steadily moderate over the next two to three years.” S&P said Friday. 

UK government bond yields have risen sharply as investors bet the Bank of England will have to keep interest rates elevated for longer to tame inflation. 

The 10-year yield, the amount the government pays to borrow for the period, is around 4.65% — close to the highest since 2008. The yield on 30-year gilts on Friday climbed to 5.16%, the highest since 1998.

The ratings decisions provide a boost for Hunt as he prepares for his autumn economic statement on Nov. 22. While the Treasury is enjoying an inflation-induced boost to tax receipts this year, Hunt has signaled the tax cuts wanted by many Conservative lawmakers are unaffordable because of the cost of servicing the national debt. 

–With assistance from Anchalee Worrachate.

(Adds Moody’s comments)

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