What the UK credit rating downgrade means for our money
Credit rating agency Moody's has downgraded the UK's credit rating by a notch. But what impact could this have on our finances?
The UK has had its credit rating downgraded by credit ratings agency Moody’s, but what does this mean and how will it affect our money?
What’s happened and why?
Moody’s has downgraded the UK's credit rating - essentially its ability to repay Government bonds or gilts (for more on these read Why gilts matter) - one notch from the much-prized AAA rating (the highest possible) to Aa1. It cited “continuing weakness in the UK's medium-term growth outlook”, the extension of the Government’s austerity programme beyond 2015, and the fact that the Government’s balance sheet may struggle to absorb a significant blow as the main reasons behind its decision.
However, many experts are calling this a psychological and political blow rather than one with longer-term financial consequences.
With the UK on so-called ‘negative watch’ for a while now, financial markets had priced in this move. So experts are not predicting a shock for the gilt market, for example.
Pound continues to fall
The slight exception to this is the currency markets. The pound has been steadily falling for a while now and this news sent it down again.
So far this year, sterling has lost nearly 7% against the dollar and 7.5% against the euro. Ed Bowsher looked at this volatility in more detail in his article Why the pound is falling and how it will affect you.
That’s bad news for us in terms of importing goods and services, for example food and oil (which will impact petrol prices). This in turn will push up inflation, still stubbornly above the Bank of England’s 2% target.
It will also impact British holidaymakers travelling abroad and expats who receive their income in sterling.
Of course, it's good news for exporters. But experts say the credit rating downgrade isn't going to be a major factor in the pound's longer-term future performance.
The Bank of England has indicated that it's happy to tolerate above-target inflation and a falling pound for now in return for growth in exports. Indeed, it seriously discussed injecting more money into the economy via its quantitative easing (QE) programme at its last Monetary Policy Committee meeting. If this happens, it will have a far bigger impact on inflation and the value of sterling.
Will the Government change course?
Another longer-term political impact could be on the Government’s future plans. Since coming to power, the Coalition has stuck doggedly to ‘Plan A’ – austerity measures designed to rebalance the nation’s books.
Chancellor George Osborne has repeatedly used the preservation of the AAA rating as justification for those measures. Whether this decision will force his hand remains to be seen, possibly as soon as next month's Budget.
What do you think of the downgrade? Will it force the Government to change course? Let us know your thoughts in the Comments box below.
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Comments
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So, no comment yet that it was the same credit rating agencies that directly precipitated the banking crisis, by rating toxic debt liabilities as AAA assets? I'll make it then... I'd prefer any BBB gilts to a US bank's AAA sub-prime residential mortgage (over simplification I know, but the truth at its core)
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@ rbgos... I read an interesting David Eddings novel whereby a small island was run as a democracy, electing those to run the island by public vote. One condition of the democratic system was that during their term in office, they had to hand over all their business dealings to an independent advocate who would look after their business interests for the duration. Depending on how well they ran the economy dictated how well their own business would weather their term, without them at the helm. One of the key problems with modern politics is that too many politicians see politics as a way of forwarding their own business career. If a politician was asked to hand over their business for the duration of their term in politics, how many would do so willingly. Probably none. Now some say that businessmen and woman make the ideal politician, because where they already run a business, they will know how to run a country. This is a fallacy. The businessman or woman is usually the investor, who pays employees to do research and development. The ability to make money does not automatically confer intelligence. When I see politicians, what I see are people who are versed in posture and gesture. They may be as thick as a plank, but if they can shout down their opposite number and gesture properly using arm movements, we will vote for them. We should be questioning the education of our MPs. Do they hold the requisite knowledge and background to do the jobs they are asked to do? Are they transparent enough for us to trust them. Some years back, under Leighbour, they commissioned a report to prove that Speeding Kills. The report, instead, proved that speeding wasn't a dominant factor in road deaths, and was subsequently buried by the Leighbour party, because it didn't state what they wanted it to state. How many times have researchers had to redo their research until it states what they WANT it to say? We live in a world where our leaders keep us in the dark, or feed us bullshit. The whole debacle over Saddam Hussein and his Weapons of Mass Destruction is one such point, even to the simple fact that a key witness committed suicide after his testimony was manipulated. An entire invasion, whether it was justified or not, was based on a lie. So, how can we judge a group who are so removed from the rest of us that they don't feel the pinch when we are in recession, who worry about which home they should use tonight, and are concerned whether they might have to switch Jags halfway through their journey. Oh, and before anyone says that they do this country a great service, no politician is in it for the country, they are in it for themselves, and what they can get out of it for themselves. After all, smoking kills, yet Mags became a consultant for a tobacco company, even though the NHS, backed by the government, were actively trying to get us to QUIT.
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CuNNaXXa, Well, there is such a system of government as you propose - it's called Totalitarianism, of various flavours. Got somewhat out of control in Germany in the 30's and 40's, and ultimately led to economic and political collapse in the USSR and it's satellite states. China seems to be making a fairly decent shot of it, at last, although it's still burdened with widespread poverty and human rights abuse. Unfortunately, when someone is is given the reigns of power for long enough to be able to make a decent long-term plan ahead, they tend to abuse that power even worse than those who only get 4-5 years at a time. As Churchill said: "...democracy is the worst form of government except all those other forms that have been tried from time to time." At least, by adding a legal obligation to balance the budget, we might be able to limit one of the current major abuses of the system.
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28 February 2013