Moody's Upgrades UK Outlook Following Mini-Budget Turbulence

21 Oct, 2023

Moody's Upgrades UK Outlook Following Mini-Budget Turbulence

The renowned credit rating agency Moody's has reversed its negative outlook on the UK, emphasizing the restoration of "policy predictability" following last year's mini-Budget upheaval.

This move follows S&P's decision to drop its negative outlook back in April. Moody's has also acknowledged the UK's "more conciliatory" approach toward EU trade relations.

Credit rating agencies evaluate a country's ability to repay its debts based on economic strength and government effectiveness. Moody's explained that Chancellor Jeremy Hunt's reversal of most of his predecessor's tax cuts played a pivotal role in their reassessment.

Moody's report indicated that Brexit had introduced increased friction, impeding the UK's efforts to curb inflation, with a return to the 2% target expected by 2026. The report also highlighted that enhanced cooperation with the EU could reduce Brexit-related uncertainties and foster economic growth.

The UK experienced a downgrade in its creditworthiness from the three main credit ratings agencies after a tumultuous mini-Budget in September, which included £45 billion in unfunded tax cuts, without projections from the government's fiscal oversight body, the OBR.

Lower credit ratings imply higher risk, often translating into elevated interest rates for borrowers.

Moody's Aa3 rating reflects the fourth-highest standing on its scale, signifying "very high quality and very low credit risk." The agency had previously awarded the UK the highest possible AAA rating from 1978 until 2013 when it was downgraded during George Osborne's tenure as chancellor.

S&P, on the other hand, removed its negative outlook in April and currently assigns the UK an AA rating, the third-highest level in its classification.

Fitch, the third major rating agency, maintains a negative outlook on the UK, with its next assessment due on December 1.