Fitch Ratings said the U.K. should keep its top credit grade, citing the government’s efforts to reduce the budget deficit and the easing of risks related to the banking industry.
“The legacy of the global financial crisis continues to weigh on the U.K. economic and fiscal outlook,” Fitch analyst Maria Malas-Mroueh said in a statement in London today. “Nonetheless, the strong budgetary consolidation effort and declining fiscal risks arising from the U.K. financial sector support the ‘stable outlook’ on the AAA ratings.”
Chancellor of the Exchequer George Osborne plans to reduce the budget deficit from 10 percent of gross domestic product this year to 1.9 percent by April 2015 and eliminate the structural shortfall. Fitch said today the plan is “credible.” Osborne is scheduled to announce his budget measures for the next fiscal year on March 23.
Fitch said the “principal risk” to the rating is a weaker-than-expected recovery that forced the government to reassess its fiscal plans and led to additional bank strains. However, it does not currently consider these threats “to be sufficiently material to threaten” the AAA rating.
The pound extended its gain against the dollar after the report was released, and was trading up 0.3 percent at $1.6132 against the dollar as of 2:47 p.m. in London. Bonds rose, with the yield on the benchmark 10-year gilt slipping 3 basis points to 3.6059 percent.
Fitch sees the economy expanding 1.6 percent this year and 1.7 percent next year, and forecasts that inflation will average 4 percent this year before easing toward the Bank of England’s 2 percent target in 2012.
It sees a risk to the recovery if soaring price growth pushes the central bank to raise its benchmark interest rate faster than investors currently expect. While the bank left its key rate on hold at 0.5 percent last week, investors have priced in a 25 basis-point increase by August and another one by December, according to forward contracts on the sterling overnight interbank average compiled by Tullett Prebon Plc.
“There is a non-negligible risk that underlying inflation pressures, including from higher oil prices, result in a sharper normalisation of policy interest rates than currently assumed,” Fitch said. That would have “potentially adverse consequences for macroeconomic financial stability.”
Prime Minister David Cameron made the deficit his top priority after Standard & Poor’s threatened to lower the U.K.’s AAA credit rating in May 2009. He reiterated his commitment in January to eliminate the shortfall amid criticism that his plans were choking the recovery.
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