Moody's Puts UK Rating On Negative Outlook

Credit ratings agency Moody's has issued official notice to Britain and the Bank of England that their credit ratings are at risk of a potential downgrade.

The agency blamed "increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years, with risks skewed to the downside".

It also said the economy remains vulnerable to the eurozone crisis.

France and Austria have been similarly graded - on negative outlook - while the ratings for Italy, Spain, Portugal, Slovakia, Slovenia and Malta have been lowered.

The decision was a surprise to investors and economists.

They had assumed that Moody's would follow the lead of its fellow ratings agencies, Fitch and Standard and Poor's, and downgrade euro members while leaving Britain's rating untouched.

It also comes as the rate of inflation is expected to drop in Britain to its lowest level in two years in a sign that the pressure on cash-strapped households has started to ease.

Although Moody's decision still leaves the UK's top-level AAA rating unchanged, a negative outlook implies that the rating could be downgraded in the coming years.

Alastair Wilson, chief credit officer for Moody's in Europe, told Sky News: "All we're saying in putting the triple A rating on a negative outlook is that there is a very, very slightly higher risk associated with lending to the UK.

"But remember the risks associated with lending to a triple A are very, very low."

The decision is a significant blow for the Chancellor, who made it one of his manifesto pledges at the 2010 election to safeguard Britain's AAA rating.

In a statement released after the Moody's decision was announced, 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."

Labour's Shadow Chancellor Ed Balls said: "Moody's is clear in its statement that the primary reason for Britain's negative outlook is 'weaker growth prospects' which are making it harder to get the deficit down.

"With our economy now in reverse, unemployment at a 17 year high and £158bn extra borrowing to pay for economic failure, the case for a change of course and a real plan for jobs and growth is growing by the day."

Alistair Darling, who was chancellor the last time the UK was put on negative outlook, said it was worth "taking note" of rating agencies as they reflect market sentiment, but acknowledged they do not have an unblemished record.

He emphasised the importance of improving growth.

"Austerity on its own cannot work," he told Boulton and Co.

Looking ahead to the Budget next month, he called on the Government to "reflect on where the economy actually is, because it is a 100 miles from where they thought it would be".