Moody’s has lowered the UK’s credit outlook to negative, saying Brexit “paralysis” has made policymaking less predictable.
The move comes a little more than a week after lawmakers backed Prime Minister Boris Johnson’s call for a general election next month, in the hope of breaking the gridlock over his plan for the UK to leave the EU.
Credit rating agencies had warned that Britain’s sovereign debt would be at risk of a downgrade in the event of a no-deal Brexit, with S&P and Fitch having already put the country on negative watch.
Moody’s, which previously had a “stable” outlook for the UK’s credit, said that the country’s institutions have weakened in the face of policy challenges and that British economic and fiscal strength is expected to soften.
“The increasing inertia and, at times, paralysis that has characterised the Brexit-era policymaking process has illustrated how the capability and predictability that has traditionally distinguished the UK’s institutional framework has diminished,” Moody’s said in its report.
Moody’s added that the decline in “institutional strength” is “likely to survive Brexit”, citing divisions within society and the political landscape.
“It would be optimistic to assume that the previously cohesive, predictable approach to legislation and policymaking in the UK will return once Brexit is no longer a contentious issue, however that is achieved,” the report said.
The UK was set to leave the EU by the end of October, but the deadline has been extended to January 31.
The agency reaffirmed the UK’s rating of Aa2. It said the rating was unchanged given credit-supportive factors including economic diversification and a sound monetary policy framework, offsetting what it described as a high debt burden and weak productivity growth.
At Aa2, Moody’s rates UK government debt two notches below the top grade — consistent with ratings by S&P and Fitch.
Sterling traded fractionally lower at $1.2768 on Friday, falling to session lows in reaction to the Moody’s report.