Still ‘AAA’, but with a negative outlook

Ratings agency Standard & Poor’s has confirmed the UK economy has a ‘AAA’ sovereign rating, although with a ‘negative outlook’.

This means that Standard & Poor’s might downgrade the UK should economic conditions deteriorate in the future.

From a political perspective, the coalition government is clearly pleased to have the triple-A status reaffirmed, following the embarrassing downgrade by Moody’s in February.

A Treasury statement explained that the decision by Standard & Poor’s stressed “the government’s commitment to continued fiscal consolidation,”

It will be interesting to see whether the other big ratings agency, Fitch, follows the lead of Moody’s or Standard & Poor’s when they make their next decision on the financial strength of the UK.

While the financial strength rating of an economy has implications for the cost of government borrowing, gilt yields are unlikely to move by much as a result of any further downgrades in the UK.

Relative to other developed economies, the UK would still be considered as a ‘safe haven’ for investors.

Other factors, including the Bank of England programme of quantitative easing, is doing more to keep gilt yields historically low than the opinions of a ratings agency.

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