Standard & Poor’s puts the UK’s credit rating under observation with a ‘negative outlook’

The UK’s credit rating was under threat of a rating downgrade late Friday when S&P, one of the world’s largest credit rating agencies, put the country in a “negative outlook” following Chancellor Kwase Quarting’s “miniature” budget last week.

The rating agency maintained the UK’s double-A credit rating, but cautioned that the outlook was negative. Standard & Poor’s said that after the chancellor’s statement, there were “additional risks” in UK lending.

The threat of a rating downgrade will prove embarrassing to the Truss government just weeks after the new prime minister takes office. The “mini” budget pushed the pound lower and interest rates higher because financial markets thought it would fuel inflation at a difficult time.

Standard & Poor’s said its decision was based on the financial statement and the government’s plan “to cut a range of taxes in addition to its previously stated intentions to provide broad support to families on energy bills”.

Credit rating agencies have lost some of their power since the 2008-2009 financial crisis when they failed to warn about the risks in several complex products that gave them top-tier ratings. But its sovereign ratings are still closely watched.

Most fiscal experts were more relaxed about the decision to spend billions on a temporary plan to keep electricity and gas bills low this winter than permanent cuts to National Insurance and income tax, including the highest rate, and a decision not to increase. The main level of corporate tax.

Last week, the pound reached an all-time low against the US dollar, before it recovered, the cost of government borrowing rose by more than 0.5 percentage points, and the Bank of England was forced to intervene to protect the pension and mortgage system. Lenders have withdrawn most fixed rate products from the market.

The S&P estimated that the UK’s budget deficit would widen by 2.6 percentage points of GDP by 2025 as a result of the Kwarteng package, making it extremely difficult for the chancellor to realize his ambition of reducing public debt as a share of national income.

“Net general government debt will continue on an upward trajectory, contrary to our previous forecast of declining as a percentage of GDP from 2023,” the rating agency said.

Standard & Poor’s said it still expects the British economy to contract over the coming quarters, adding that it remains unclear whether government promises to cut borrowing from public spending cuts will materialize and will be enough to put debt back on a downward path.

This will be particularly difficult, he added, in the context of a weak global economy, and rising interest rates that are hurting the housing market and denting consumer sentiment.

With the government’s financial watchdog muzzled until late November, Standard & Poor’s predicted a difficult period for the British economy.

“We consider our updated financial outlook to be subject to additional risks, for example if UK economic growth becomes weaker due to further deterioration in the economic environment, or if government borrowing costs increase more than expected, driven by market forces and monetary policy tightening.”

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