Keeping our AAA rating

The UK is set to keep its coveted ‘AAA’ credit rating, according to the latest assessment from agency Standard & Poor’s.

Referring to the strength of Sterling and monetary flexibility in the UK, S&P said they expect the British economy to pick up in the second half of the year.

They expect the government to continue managing tight budgets as the outlook for the important credit rating remains ‘stable’.

This will be welcome news for the government following the recent news that the UK economy remains in a deeper than anticipated recession.

In fact, the outlook from S&P sounds more positive than it has been recently; they noted the “ability to absorb shocks” in the UK economy, as household savings and corporate cash levels have improved.

This credit rating is important as it allows the UK to borrow money cheaply.

A lower credit rating means that the risk of lending money to the government is greater, which pushes up the cost of borrowing.

The yields on UK government bonds (Gilts) are currently around record lows, as investors seek a safe haven (relative to the troubled eurozone) and the Bank of England buys more Gilts through its asset purchase programme of quantitative easing.

Despite this reassuring outlook from Standard & Poor’s, we could yet see the Bank of England take further action to stimulate the UK economy.

With worse than expected GDP figures last week, combined with larger than expected falls in the pace of price inflation, we would not be surprised to see an interest rate cut to 0.25% announced on Thursday.

Photo credit: Flickr/Theen