(Bloomberg) -- Ratings firms delivered their verdict on how they’re assessing the new Labour Party budget, which unnerved financial markets this week.
The most aggressive fiscal loosening since 2020 pandemic measures poses new challenges to public finances, according to Moody’s Ratings. S&P Global Ratings said looser policy will keep pressuring UK public finances.
It’s the first sense of how ratings firms are assessing the budget, which sparked a selloff in government bonds, shares and the pound as traders react to the risk of a borrowing surge and inflation.
The selling that followed Chancellor of the Exchequer Rachel Reeves’s midweek budget announcement started to fade on Friday, though the yield on benchmark 10-year gilts has climbed as much as 20 basis points in just five days.
In its Friday report, Moody’s said the increase in borrowing, in part facilitated by a new measure of debt under the fiscal framework, would pose an “additional challenge” for already-difficult fiscal consolidation prospects in the UK.
Financial markets should “remain more sensitive to the potential for UK policy missteps, because of the gilt market turmoil that followed the September 2022 mini budget,” the Moody’s analysts said. The firm rates the UK at Aa3 with a stable outlook.
The measures unveiled on Wednesday included a £70 billion ($90 billion) annual increase in public spending and an extra £100 billion of expenditure on capital projects.
Though the selloff this week doesn’t compare with the fallout from former prime minister Liz Truss’s plan, rising gilt yields are politically sensitive for Reeves given how she has framed her party as being in tune with investors.
S&P, which rates the UK as an AA credit with a stable outlook, kept its key debt forecasts unchanged because its “existing projections already contain wider deficits that reflect lingering public spending pressures.”
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