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Credit rating firms hold fire after UK energy price cap splurge

·2-min read
Pylons carry the Beauly to Denny Power line near the Drumochter Pass, Scotland

By Marc Jones

LONDON (Reuters) - Rating agencies responded to Britain's 100 billion pound-plus energy price cap plan on Thursday by signalling they would wait for a mini budget planned for later this month to make any decisions on the UK's credit score.

New Prime Minister Liz Truss' plan to freeze soaring consumer energy bills for two years could cost up to 150 billion pounds, according to DBRS Morningstar, Europe's next biggest ratings firm behind S&P Global, Moody's and Fitch.

One of the firm's top analysts Adriana Alvarado said the amount was substantial and put the spotlight back on the UK's commitment to getting its public finances back on a sustainable path.

"It is bigger than expected, with some initial estimates pointing to around 150 billion pounds, which can certainly lead to a deterioration in public finances, particularly in the near term," Alvarado said.

He added that the AA-rated UK, which saw its debt-to-GDP ratio top 100% during the COVID-19 pandemic, had only just started bringing it down again. How it planned to pay for this new support would now be key.

S&P, Moody's and Fitch, who all have 'stable' outlooks on their UK ratings were still to give their opinions but the Germany-based Scope agency said it too was waiting for details on how the borrowing would be paid for.

"Ultimately we will have to wait for the mini-budget to be set out by the chancellor later this month which should provide further details of how the support measures would be funded," Scope's director of Sovereign ratings, Eiko Sievert, said.

A reduction in headline energy prices could lower the amount the UK government has to pay on its inflation-linked debt payments.

"But it could also maintain somewhat higher pressure on core inflation, causing the Bank of England to further raise interest rates," Sievert added.

Scope had expected a gradual decline in the UK public debt towards 84% of GDP by 2027 after a steep increase during the pandemic to 103% of GDP in 2020.

Thursday's spending though could keep it there or even raise it further. That would be well above the expected 2027 levels for AAA-rated economies such as Germany and the Netherlands at 65% and 47% respectively, although still lower than in some AA-rated peers such as France at 115% and Belgium at 118%.

($1 = 0.8696 pounds)

(Reporting by Marc Jones; Editing by Hugh Lawson)