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Pound Under Pressure After Rating Downgrade

(c) Sky News 2013

Chancellor George Osborne will answer to MPs for the loss of the UK's prized AAA credit rating later today, after Labour was granted an urgent question in the House of Commons.

Mr Osborne is to respond in the Commons to shadow chancellor Ed Balls amid the continued political and economic fallout of Friday's rating downgrade.

He suffered a serious reverse on Friday when credit agency Moody's revised downward its verdict on the UK economy - intensifying the pressure on sterling.

Ministers have played down the impact of the change on the Government's borrowing costs which had already been largely priced into the markets.

But Labour has hailed it as a "humiliation" for Mr Osborne, who previously declared that retaining the top-grade rating was a measure of the success of his austerity drive.

The pound slipped overnight following the UK's credit rating downgrade on Friday, but London's FTSE 100 (FTSE: ^FTSE - news) opened higher as the week's trading began.

In Asia, sterling fell to a 31-month low against the dollar and a 16-month trough versus the euro, but the pound recovered slightly early on Monday, and by late-morning was down 0.1% against the dollar at $1.515.

The euro was up 1.27% at 87.58p, not far from its high of 87.75p.

In contrast to the currency market movements, reaction to the downgrade on other markets was muted with economists saying the move was expected and had already been priced in.

The FTSE 100 stock market opened up around 40 points higher at 6375.

Fears that the downgrade would lead to a rise in the cost of borrowing by the UK Government also looked to be unfounded, with the price of British 10-year debt bonds falling beneath their level at the time of Friday's downgrade.

European economist Sarah Hewin at Standard Chartered (Other OTC: SCBFF - news) said the move had already been taken into account.

"The market had anticipated that there would be a downgrade - perhaps the timing of it was a little earlier than expected," she told Sky News.

But she added that the outlook for the UK economy looks "pretty grim".

"The growth rate is struggling, and this was something that Moody's outlined in particular - It's the result partly of fiscal austerity, partly of a credit squeeze on the economy, partly the result of weak export markets.

"So it's going to be a long struggle, I think, back to recovery," she said.

Explaining Britain's downgrade from AAA to AA1, Moody's pointed to "subdued" growth prospects in the UK and a "high and rising debt burden".

It now expects the "period of sluggish growth" to "extend into the second half of the decade".

Ms Hewin said: "The good news is - if there is any good news in this story - is that Moody's outlook for the UK is stable.

"For now the greatest risk is that we see Standard & Poor's and Fitch following suit as well, moving the UK from their AAA rated status down to AA."

Following the move, senior Conservatives rallied round Chancellor George Osborne, predicting it would have little impact on the Government's borrowing costs.

But Tory backbenchers upped calls for tax and spending cuts to kick-start growth, warning that next month's Budget is the "last chance saloon".

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