Moody's is now warning Britain that they are now at risk for a downgrade unless they are able to control their budget deficit.
Moody's, the ratings agency, said Britain's triple-A credit rating could be at risk if slower growth makes it harder for the government to rein in its budget deficit.
Reuters 12:32PM GMT 24 Mar 2011
Posted on The Telegraph
"The government's ongoing commitment to large-scale deficit reduction is very important to the Aaa rating and stable outlook," Moody's said the day after George Osborne downgraded growth forecasts in his 2011 Budget.
"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," Moody's said in a statement.
Moody's downgraded its own forecast for British growth this year to 1.6pc from 2pc, below the 1.7pc forecast by the government's independent Office for Budget Responsibility in Wednesday's Budget.
The Chancellor last year pledged to raise an extra £30bn in tax and cut £80bn of spending by 2014 to slash the country's record deficit and yesterday stressed:: "We're sticking to it."
However, he faces a difficult task with the government's independent Office for Budget Responsibility saying spending will be about £10bn higher than expected from 2013. Not because his tough cuts have been relaxed but because borrowing costs on Government debt have increased by £3.1bn and the welfare bill is £4.3bn more expensive.
Preserving the triple-A sovereign debt rating that Britain enjoys from the major ratings agencies is a top economic priority for the country's coalition government of Conservatives and Liberal Democrats.
Sterling slipped after the Moody's warning and weaker-than-expected UK retail sales data highlighted the downside risks to economic growth.
Both reports pushed the pound lower. Sterling lost as much as half a cent against the dollar to trade at a one-week low of $1.6149, and the euro jumped more than half a percent to 87.40p.
However, reported solid demand for sterling from Middle East and Asian central banks helped the pound pare its losses against the dollar, at least, although it remained below $1.62.
"The (sales) data suggests that BoE members sitting on the fence regarding rate hikes will continue to do so," said Peter Luxton, economics adviser at Informa Global Analaysts.
British retail sales in February fell 0.8pc on the month, sharply slowing the annual rate of growth to 1.3pc in February from a downwardly revised 5.1pc in January.
The figures backed up the slight shift in interest rate expectations this week following Wednesday's Budget and minutes from the Bank of England's last policy meeting.
Money markets are now betting on an interest rate increase in August. On Tuesday, after inflation jumped to its highest in two and a half years, they had been expecting the first hike in July.