UK outlook cut to 'negative' by Moody's over political turmoil

Rating agency also notes risk of sustained weakening in policy credibility

Prime Minister Liz Truss resigned on Thursday sparking a new leadership race. Getty Images

The outlook for the UK’s credit score was revised to negative by Moody’s Investors Service following weeks of turmoil in the British government, during which the new prime minister resigned after only 45 days.

The rating agency said the change was driven by “heightened unpredictability in policymaking” amid weaker growth prospects, high inflation and “risks to debt affordability from likely higher borrowing”.

The company affirmed the country’s rating at Aa3, a statement said.

The rating action comes several weeks after the firm said that the UK government’s mini-budget, which was later scrapped, risked doing lasting damage to the nation’s debt affordability.

It also noted a risk of a sustained weakening in policy credibility.

Liz Truss resigned on Thursday to become the shortest-serving prime minister in history.

Her mini-budget was a package of unfunded tax cuts and spending promises that caused markets to panic.

During her short premiership, gilt yields posted some of their biggest moves on record and the pound sunk to a record low.

Both Fitch Ratings and S&P Global Ratings lowered the country’s outlook to negative after Ms Truss’s tax cut plans amid rising fiscal risks. S&P rates the nation AA, the third-highest level, while Fitch Ratings scores it one level lower at AA-.

The pound fell 0.8 per cent on Friday to a weekly low of $1.115, reversing the brief rally after Ms Truss announced her departure. It dropped 0.5 per cent against the euro to €1.142.

The slide came as Conservative MPs began manoeuvring for the frantic week-long leadership contest to succeed Ms Truss.

Rishi Sunak, Boris Johnson and Penny Mordaunt are in the frame to succeed Ms Truss but none of them are yet considered the clear favourite.

Market moves have been particularly closely watched in Westminster since the botched mini-budget on September 23 drove Britain into economic turmoil.

The package of more than £40 billion ($44.5bn) in tax cuts led to a crash in sterling's value, a jump in mortgage costs and an emergency intervention by the Bank of England to protect pension funds.

Ms Truss's authority never recovered from the mayhem.

The contest to succeed her is being compressed into a week so that the new leader will be in place before October 31, when the chancellor is expected to set out a new fiscal plan.