As the UK annual rate of inflation falls to 3.6 per cent, credit ratings agency Moody’s downgrades six European nations and warns that Britain’s AAA rating could be cut.
Moody’s said it was worried about Europe’s ability to undertake the kind of reforms needed to address the crisis and the amount of funds available to fight it, adding that the region’s weak economy could undermine austerity drives by governments to fix their finances.
Traders said that the Moody’s warning was not expected to put a lot of pressure on equities as the move was just a reminder of already known issues such as fiscal problems in the region, although investors are likely to stay cautious.
This is a reality check for anyone who thinks Britain can duck confronting its debts. George Osborne
Chris Weston, institutional trader at IG Markets, said: “We have seen S&P’s put the UK on review in 2009; however nothing really came from it, so we feel the actual probability of a downgrade remains less than 50 percent.”
Responding to the news, the Chancellor George Osborne said: “This is proof that, in the current global situation, Britain cannot waver from dealing with its debts.
“Moody’s are explicit that it is only the Government’s ‘necessary fiscal consolidation’ that is stopping an immediate downgrade, which would happen if there were any ‘reduced political commitment to fiscal consolidation including discretionary loosening’.
“This is a reality check for anyone who thinks Britain can duck confronting its debts.”
Both measures of inflation have fallen sharply as expected.
The consumer prices index (CPI), the government’s preferred measure, dropped from 4.2 to 3.6 per cent in January. The retail prices index, which includes housing costs, fell from 4.8 to 3.9 per cent.
The drop was due to the fact that the effect of the government’s VAT hike is no longer included in the figures.
The government’s target for CPI inflation is 2 per cent.
But Channel 4 News Economics Editor Faisal Islam said: “For the best part of a year the chancellor has been making speeches boasting about how Standard & Poor’s removed Britain from negative outlook for its AAA sovereign rating.
“During the autumn statement speech just 10 weeks ago he even described how Britain was the only major country that had seen its ‘credit rating improve’.
“So by his own measure we are justified to describe Britain’s credit rating as worsened or deteriorating even if it hasn’t been cut. It’s in the relegation zone to be cut. And 30 per cent of the time negative outlook leads to a downgrade.
“So how does the chancellor manage the intellectual contortion that coming off negative outlook and then going back on negative outlook are both vindications of his macroeconomic policy?”