The prominent global credit rating agency, Moody’s has cut the UK’s credit rating outlook to “negative” after the nation voted to leave the EU. The outcome is expected to herald an extended period of concern.
The rating agency said the result of the referendum would have significant negative inferences for the nation’s medium-term growth position. It also reduced the UK’s long-term issuer and debt ratings to “negative” from “stable”.
The agency stated that the negative impact from lesser economic growth would offset the fiscal savings from the UK since the nation need not contribute to the EU budget in the future. It added that the nation had one of the biggest budget deficits among developed nations.
Experts believe that in the long term the UK’s credit rating may have an impact on the nation’s households.
Traditionally, the borrowing rate of the government is the standard for the other interest rates pertaining to the economy to be established.
Usually, a lower rating would typically match to higher borrowing costs. Under such a scenario, the impact would be felt by various sections in the longer term – the government, firms, and households.
The financial assessment came after the historic referendum in the UK on June 23rd, 2016. In essence, credit rating agencies, rate a nation on the basis of its economic strength.
More precisely, they rate governments, large firms on how likely they would pay back their debt. In other words, the greater a credit rating, the less expensive it is for a nation to borrow money in the global markets.
Therefore, theoretically, when a government wishes to secure money, a high credit rating would indicate a lower interest rate (and vice versa).
Globally, there are three key rating agencies – Moody’s, S&P and Fitch. S&P and Fitch have not yet issued a statement on the UK post-referendum.
Credit rating agencies also provide every nation a precise credit rating score. With regard to Moody’s and the UK, presently it scores the UK at “Aa1”.
In Moody’s rating scale, it is the second highest rating. It indicates “high grade”, under “AAA” which is “prime”.
By altering its position to “negative”, Moody’s has cautioned that the UK’s “Aa1” rating could be at risk of being reduced.