What do the ratings cuts mean for the UK?

What do the ratings cuts mean for the UK?One fairly swift consequence of the vote to leave the EU was a cut to the UK’s credit ratings.

Ratings agency S&P cut the UK’s top AAA credit rating due to fears Brexit could lead to “a deterioration of the UK’s economic performance, including its large financial services sector”.

Prior to the referendum, S&P had been the only major ratings agency to maintain a AAA rating for the UK.

Concerns about how Brexit might damage the economic performance of the UK resulted in S&P cutting the rating by two notches to AA.

Fitch, another ratings agency, cut the UK’s rating from AA+ to AA, with a prediction of an “abrupt slowdown” in UK economic growth in the short-term.

Another major ratings agency, Moody’s cut the outlook for the UK’s credit rating outlook to negative.

When a country experiences a downgrade to its sovereign debt credit rating, it should in theory result in a higher cost of borrowing.

The UK government might have to pay more to borrow money in the international financial markets in the future, now it no longer holds the top credit rating.

According to one fund manager, this credit rating cut might only be the start.

Bryn Jones, Head of Fixed Income at Rathbones, said:

“Following from the recent downgrades to UK debt, I believe more cuts are in the pipeline for UK sovereign debt.

“I suspect that supranationals, which rely on capitalisation from the UK, are next in the firing line to lose their triple AAA status. We are already seeing pressure on Europen Investment Bank (EIB) bonds.

“There are some suggestions about the Bank of England introducing a corporate bond buying programme, which in my view, should include financials, as corporate bonds are holding up well by comparison.

“Interest rates may well be cut in the UK, but I don’t see them lapsing into negative territory.

“While in the past downgrades by agencies have been seen as largely retrospective and immaterial, these downgrades are likely to increase risk and long-term funding costs.”

It is worth noting that the UK was not alone in facing a cut to its credit rating last week.

S&P also cut its credit rating for the European union, from AA+ to AA, after reassessment “of cohesion within the EU, which we now consider to be a neutral rather than positive”.

They explained that the decision by the UK to leave the European Union had triggered “greater uncertainty” over long term economic planning.

Here at Informed Choice, we continue to monitor economic and political developments following the referendum, to understand how these might impact upon financial planning and wealth management.

Our advice to clients remains to stay focused on long-term financial goals, maintain a well diversified portfolio of investments and consider capacity for investment loss as a limiting factor on equity exposure.

 

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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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