The rating agency, Moody’s, handed the UK a Credit Rating Downgrade from triple A down a peg to Aa1. Investors responded by pushing the British pound $1.5073 against the dollar, the lowest level since July of 2010. Britain’s lackluster economy and anxiety over the monetary easing program of the Bank of England has had a negative impact on things as well.
In spite of the government’s insistence that the UK would come to grips with the difficulties of it’s debt and deficit and assurance that the UK would “pay its way in the world,” a government spokesman said “The UK faces a very significant debt and deficit problem that is going to take time to deal with,” and “The government could not have been clearer about that from the very start of this government.”
The credit downgrade increases tension on the pound which became apparent last week after minutes of a BoE strategy meeting indicated Governor Mervyn King and other officials, gravitated towards another dose of the bond-buying that injects more fiat money into the economy — a policy known in Britain and elsewhere as quantitative easing (QE) that has heretofore been heavy on the quantitative and light on the easing.
The bank’s report earlier this month also suggested state policy makers, in the interest of growth, were willing to allow higher inflation.
“(The credit rating reduction) reinforces the perilous economic position the UK is in,” stated Kathleen Brooks, research director at Forex.com. “This downgrade may fuel more speculation that QE will be re-started later this year. This is pound-negative for the medium term and we could see sub-$1.50 in the near term.”
This monetary easing is widely viewed as damaging to the currency as it calls for the central bank to “print” additional money to buy bonds. Whether that is actual printing or merely the addition of zeros to a computer account, it enlarges the reservoir of currency and eats away at its value.
By permitting higher inflation in the years to come, both real and inflation-adjusted returns for investors will shrink, making the UK assets in general less inviting and may get Britain another credit rating downgrade.