THE POUND is set to fall dramatically when the money markets open in the City of London today, following Britain’s first ever sovereign ratings downgrade at the end of last week.
After the European markets closed on Friday night, ratings agency Moody’s moved against Sterling, stripping the UK of its AAA rating.
Moody’s said that ‘continuing weakness in the UK’s medium-term growth outlook’ lay behind its decision to cut the rating from AAA to AA1.
It said the government faces significant ‘challenges’ to its ‘fiscal consolidation programme’, adding that the rise in public sector debt is ‘unlikely to reverse before 2016’.
Sterling fell by almost a cent against the dollar to around $1.5163 after the downgrade on Friday, following Thursday’s two-and-a-half-year low.
Chancellor Osborne has repeatedly described Britain’s AAA rating as ‘the key test of this government’s economic and political credibility’.
Shadow chancellor Ed Balls called the downgrade a ‘humiliating blow’ for Osborne.
But Osborne’s Coalition partner LibDem Business Secretary Cable sought to dismiss the cut, describing ratings as ‘largely symbolic’.
‘In terms of the real economy, there is no reason why the downgrade should have any impact,’ Cable claimed, before moving on to denigrate rating agencies, describing them as ‘tipsters’.
Osborne’s predecessor, former Labour chancellor Darling, said: ‘We’re absolutely stuck, there’s been no growth for the last two years.’
Darling accused Osborne of ‘recklessness’, adding: ‘I’m sure he will reflect on whether it was wise to go on about the triple-A rating so much.’
The City expects the pound to suffer today, when speculators fully respond to the Moody’s downgrade.
Gilts, or UK sovereign debt, could also be hit, pushing up Britain’s cost of borrowing and a full-blown panic could follow.
Paul Griffiths, co-global head of fixed income at Aberdeen Asset Management, warned: ‘The immediate concern is likely to be a further weakening of the pound, which has already had a move lower in the first few weeks of this year.’
Howard Archer, chief UK economist at IHS Global Insight, said the pound is ‘particularly vulnerable’, having already fallen almost 7% against the US dollar since the start of the year.
• The TUC has called an eve-of-Budget demonstration for next month.
The TUC stated: ‘Ordinary families are paying the price for an economic slump they did nothing to cause.
‘With prices rising and wages held back, living standards are under attack.
‘Public services are being slashed across the country, as jobs are cut.
‘Millions – both employed and unemployed – will see benefits fail to keep up with prices.
‘Yet this April the 50p tax for the richest will be cut, and ministers press on with austerity policies that hold back growth and threaten a triple dip recession.
‘It’s time to change course and build a future that works – starting with the budget due on March 20.
‘The TUC will be putting the pressure on Chancellor George Osborne to change course, with a public rally in Westminster on the evening of 13 March, from 6pm.’