UK Markets open in 3 hrs 35 mins

Britain's Premium Credit Rating Downgraded

(c) Sky News 2013

Rating agency Moody's has stripped Britain of its top-grade AAA credit rating, citing slow growth and a rising debt burden.

After the international agency announced the one notch drop to AA1, Chancellor George Osborne said it was a "stark reminder" of the country's debt problems.

Moody's said Britain's recovery was proving to be significantly slower than previous rebounds from recession and it did not expect the situation to change.

"[There's] increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years," it said.

Moody's is the first of the major credit rating agencies to knock the UK off of its top rating.

The ratings agency also cut the Bank of England's AAA rating by one notch, also to AA1.

Sky Economics Editor Ed Conway said: "The fact that Britain has lost its AAA crown for the first time since credit ratings were given to the UK back in the 1970s, it's a really big blow to Britain's reputation.

"It's something of an economic blow, but in a way it's more of a political problem for Chancellor George Osborne. He made a key part of the Conservative election pledge to safeguard Britain's credit rating."

On Friday evening, the Chancellor said: "We have a stark reminder of the debt problems facing our country - and the clearest possible warning to anyone who thinks we can run away from dealing with those problems.

"We are not going to run away from our problems, we are going to overcome them."

Moody's said that the British economy is constrained both by the troubled global economy and the drag from businesses and the British government slashing their debt burdens.

"Moreover, while the government's recent Funding for Lending Scheme has the potential to support a surge in growth, Moody's believes the risks to the growth outlook remain skewed to the downside," it said.

Mr Osborne has been coming under increasing pressure to take action to stimulate the British economy.

He has used maintaining the top credit rating for government bonds as one of the key arguments for the Government's austerity programme.

However, Labour has insisted that withdrawing demand from the economy has put it more at risk by stunting growth.

Labour shadow chancellor Ed Balls said: "This credit rating downgrade is a humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of their economic and political credibility.

"In the Budget the government must urgently take action to kick-start our flatlining economy and realise that we need growth to get the deficit down. If David Cameron and George Osborne fail to do so and put political pride above the national economic interest we face more long-term damage and pain for businesses and families."

More From Sky News