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Portfolio > Economy & Markets

Moody’s Says Britain’s Rating Could Feel Impact of Slower Growth, Deficit

By Marlene Y. Satter

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Britain unveiled its 2011 budget on Wednesday, showing slower growth and higher inflation, both of which would affect its efforts to rein in debt. On Thursday, Moody’s Investors Service said that the nation’s AAA sovereign debt rating and its stable outlook as well could be in jeopardy.

Reuters reported that the budget presented by Finance Minister George Osborne showed that inflation was running at more than twice the 2% target, and that growth forecasts for 2011 and 2012 had both been cut—the former to 1.7% from a November forecast of 2.1%, and the latter to 2.5% from a November prediction of 2.6%. Moody’s downgraded its own prediction for the country’s growth to 1.6% from 2.0%, and warned that deficit control would be critical.

In a statement, Moody’s said, "The government's ongoing commitment to large-scale deficit reduction is very important to the AAA rating and stable outlook." The ratings agency continued, "Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK's sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK's debt metrics to deteriorate to a point that would be inconsistent with a AAA rating,"

Maintaining that AAA rating is a top priority for Britain even as its economy is slowing. In his budget presentation, Osborne said the corporation tax would be cut by 2 percentage points to 26%; only a 1 point cut had been planned. To compensate, a bank levy would be increased. He also said that the substantial increase in oil prices would hold inflation at a 4-5% rate for the rest of 2011, and that it would not fall back to 2.5% till 2012.

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