- The pound fell against the dollar on Thursday as Fitch Ratings downgraded its outlook for the UK.
- The currency fell by as much as 0.8% to $1.1242 and also lost ground against the euro.
- The “large and unfunded fiscal package” could lead to a significant increase in fiscal deficits over the medium term, Fitch said.
The pound dropped against the dollar Thursday, with a second straight session of losses coming after Fitch Ratings said it may downgrade the UK’s credit rating on risks stemming from the government’s plan to stimulate economic activity.
“The large and unfunded fiscal package announced as part of the new government’s growth plan could lead to a significant increase in fiscal deficits over the medium term,” said Fitch in a statement late Wednesday. It revised its outlook to negative from stable while affirming the country’s credit rating at AA-.
The UK’s currency fell by as much as 0.8% to $1.1242 then trimmed the loss to 0.6%. Pound sterling declined against the greenback on Wednesday as UK Prime Minister Liz Truss defended her tax cut plan at the Conservative Party’s conference, erasing a short-lived rally. The pound has lost about 16% against the dollar during 2022.
The pound also fell against the euro on Thursday, down 0.4% to buy 1.1408 euros.
Financial markets were rocked by the government’s debt-funded policy announced last month, worried it would spike up inflation and interest rates further and put more pressure on the UK’s weakened economy.
Fitch said factors that would contribute to a credit downgrade include a failure by the UK to implement a credible fiscal strategy that restores market confidence and that’s consistent with government debt/GDP declining over the medium term.
UK Chancellor Kwasi Kwarteng had outlined a £45 billion tax reform plan but later said the government would scrap the part of the tax cut package aimed at high earners.
“Although the government reversed the elimination of the 45p top rate tax … the reportedly negative impact of the tax package, and related financial market volatility, on public opinion and the government’s weakened political capital could further undermine the credibility of and support for the government’s fiscal strategy,” said Fitch.
Fitch said without compensatory measures, the general government deficit will “remain elevated” at 7.8% of GDP in 2022 and increase to 8.8% in 2023, compared with deficits projected to average 2% for the ‘AA’ median.
The change in fiscal trajectory will push general government debt to 109% of GDP by 2024 from an estimated 101% in 2022, which would be more than double the forecast ‘AA’ median of 49%, said Fitch.
Standard & Poor’s last week downgraded its UK credit outlook to negative from stable.
