25 Feb 2013

Pound wavers after post-downgrade plunge

Chancellor George Osborne insists he will not change course despite Moody’s downgrading of Britain’s prized AAA credit rating, which caused the pound to fall to a 31-month low against the dollar.

Britain’s downgrading – its first cut since the 1970s – was a huge blow for Chancellor George Osborne, who has previously been at pains to express how Britain’s triple A status was the key signifier of a healthy economy.

On Monday, he was forced to make a Commons statement on the decision after Labour’s Ed Balls was granted an emergency question. Mr Osborne insisted: “We will go on delivering on the economic plan that has brought the deficit down by a quarter,” adding that the decision had not resulted in “excessive volatility” in the markets.

However Shadow Chancellor Ed Balls said that Mr Osborne was “making it up as he goes along”. And in reference to the #downgradedchancellor hashtag that has taken hold of Twitter since Moody’s decision, Mr Balls added: “the first economic test he set himself, now failed by this downgraded chancellor.”

The chancellor was greeted by calls to “resign” by Labour backbenchers. But he retorted that Labour had no plan other than to “repeat mistakes made by his colleagues when they were in charge”.

Symbolic downgrade?

Ministers have played down the impact of the change on the government’s borrowing costs: Business Secretary Vince Cable dismissed the downgrade as “largely symbolic”, and ministers and senior party figures rallied round the chancellor following the decision by Moody’s.

But it was a slap in the face for an already weakened pound. The value of sterling had been falling for weeks amid concerns over the UK’s “negative outlook”, and then plunged after news of the downgrade on Friday evening. So far this year, sterling has lost nearly 7 per cent against the dollar while the euro has gained 7.5 per cent against the pound.

Overnight trading in Asia left the pound at a 31-month low against the US dollar and at a 16-month low against the resurgent euro, although sterling later recovered some of this lost ground.

However the FTSE 100 Index opened around 40 points higher at 6375, reflecting the fact that a large proportion of its earnings comes from overseas, triggering potential benefits from the weakness of sterling.

Moody’s downgrade from AAA included a warning that growth would “remain sluggish” over the next few years and said that the government’s policy of reducing debt faced significant “challenges”.

Pre-Budget pressure

Politicians from all sides have urged the government to rethink its austerity measures ahead of next month’s Budget. Labour repeated its calls for borrowing to be increased in the short term to fund a fiscal stimulus, while Tory backbenchers also upped calls for tax and spending cuts to kick-start growth.

There is also a fear that inflation, now at 2.7 per cent, could pass the 3 per cent mark.

Away from the Westminster pressure cooker, however, a weak currency could be considered good news for British producers by making exports cheaper.

Some analysts also pointed out that downgrades did not have a huge impact on the US and France. “Most in the markets see the downgrade as a symbolic move that will likely heat up the political discussions over the UK’s damp economic growth prospects and spur the coalition government to launch bolder policies to drive growth,” said ETX Capital market strategist Ishaq Siddiqi.

But after his previous insistance that the top-grade rating should be a measure of success, the aftermath of the downgrade is not expected to disappear any time soon.