Howard Archer, chief UK and European economist at IHS Global Insight, said “the pound will be particularly vulnerable” following the ratings agency’s move last night. Moody’s pointed to “continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth” which it expects will “extend into the second half of the decade”.
Germany and Canada are now the only major economies to still enjoy a AAA rating.
While the Moody’s downgrade of UK debt is politically significant, many economists question the credibility of the ratings agencies and say that the importance of a country’s rating to its borrowing costs is much less significant than in earlier decades.
Mr Archer called the move by Moody’s “an embarrassment for the Government and a cause for piqued pride”.
However, he added: “We suspect that the loss of the AAA rating will have only a limited negative impact for the UK economy.
“This was the case for both France and the USA.
“There are so few countries left now with a AAA rating, that to lose it is not the stigma or major threat to market confidence that it would have been say a couple of years ago.”
He said the downgrade had largely already been “priced into the markets” but warned that the pound will suffer.
Kathy Lien, managing director at BK Asset Management, said: “You’ll see some more aggressive selling [of sterling] when markets open [in Asia] on Sunday.”