• Moody’s has downgraded the UK’s economic outlook from “stable” to “negative”.
• Ratings agencies assess a nation based on how robust its economy is, and how safe it is to borrow money.

Due to political unpredictability and high inflation, ratings agency Moody’s has downgraded the UK’s economic outlook to “negative.”

The UK’s outlook, which indicates how probable it is to repay its obligations, was altered by Moody’s from “stable.”

In essence, rating agencies assess a nation based on how robust its economy is.

Standard & Poor’s (S&P), another significant credit rating agency, and Moody’s both kept their evaluations of the UK’s credit rating in place.

Governments or large corporations are given a score by rating agencies based on how likely they are to repay their debt.

The cost for governments to borrow money on the global financial markets depends on the grade. Theoretically, a good credit rating translates into reduced borrowing rates (and vice versa).

Every organization assigns a specific credit rating score to various nations. They start at the highest rating of “AAA,” which stands for “prime,” and go all the way down to the lowest reading of “D,” which means “in default.”

Despite stating that there are “risks to the UK’s debt affordability,” Moody’s maintained the fourth-highest rating on its scale, Aa3.

S&P kept the UK’s rating at AA, its third-highest rating level, and kept its previously altered outlook of negative from stable.

The results released on Friday do not signify a fall in the UK’s credit rating, but a poor outlook suggests a future downgrade. Positive or stable outlooks are the other options available to countries, and each outlook term normally lasts 12 to 18 months.

Two “drivers,” according to Moody’s, were responsible for the company’s decision to alter the UK’s economic forecast.

The first was listed as “the elevated risk to the UK’s credit profile from the greater ambiguity in policymaking within a volatile domestic political scene,” according to the report.

The UK’s “capacity to manage the shock emerging from poor growth prospects and high inflation,” according to Moody’s, was challenged by this.

The government’s mini-budget, the repeal of most of its programs, and the change in prime minister, according to the rating agency, are all “continued reflections of the diminishing predictability of fiscal policymaking witnessed in recent years.”

After the mini-budget in September, when investors were alarmed by the then-chancellor Kwasi Kwarteng’s promise of significant tax cuts without specifying how the government would pay for them, borrowing rates for the government shot up. This is why Moody’s released its assessment.

In an effort to calm the markets, the current chancellor, Jeremy Hunt, reversed the majority of the tax cuts from the mini-budget on Monday, but economic policy are on hold as a result of the resignation of Prime Minister Liz Truss.

The UK’s policy credibility was further eroded by the government’s initial inability to address investor worries about this unfunded stimulus, according to Moody’s, and it is unclear that it will be fully restored by the decision to roll back most of the tax cuts.

The potential of more persistent inflation as well as the likelihood of higher borrowing were cited by Moody’s as the second factor in its decision to alter the outlook.

On Friday, when investors reacted to negative economic statistics amid the political unrest, government borrowing prices increased as the pound fell.

The yield on bonds with 30-year maturities increased back above 4%, increasing the cost of borrowing for the government. In the days following the mini-budget, they had reached 5.17%.

In the meantime, the yield on bonds with a five-year maturity date that supports the cost of new five-year fixed rate mortgages increased to 4.09%.

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