Following the decision by Moody's Investor Services to strip the UK of its AAA credit rating, what happens to sterling, inflation and exports? We have a quick Q&A here:
Moody’s downgrade is expected to cause the pound to fall but few economists expect an outright run. The broader impact of Moody’s downgrade is that Osborne has even less wriggle room either for spending increases or tax cuts in the Budget.
= A weaker pound will increase import prices. Has the UK’s inflation problem just got worse? =
There’s no denying it: a weaker pound increases the cost of imports and therefore consumer goods. Petrol prices are particularly vulnerable the price of filling up a family car has risen £3.12 this year already and petrol is likely to rise another 3p a litre before Easter.
= If Government borrowing costs are rising, will my mortgage get more expensive too? =
George Osborne once said that when AAA ratings are lost “interest rates go up, mortgage rates go up, unemployment goes up and families are squeezed.” But a rise in interest rates could take months or even years to filter through and would be resisted by the Bank of England which has made it clear that it wants to keep rates low, regardless of inflation.
= Will the rest of the rating agencies now follow Moody’s lead? =
Fitch has already put the UK on a negative outlook; it’s due to report after next month’s Budget. Standard & Poor’s is likely to follow.