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AAA Q&A: why the UK's rating downgrade matters
Moody’s decision to strip the UK’s of its prized AAA credit rating late last Friday has huge political, economic and investment significance.
What does it mean for Osborne and the economy?
The downgrade is undoubtedly a big political blow to George Osborne and the coalition government. It casts doubt on the credibility of its economic policies and dims its chances at the next election.
Economists say Osborne had it coming, that Moody’s is merely catching up with reality.
The government is being accused of making several key errors of judgement: basing its policy on something it couldn’t control, ie, credit ratings agencies’ judgements; using too much accounting jiggery pokery; and mouthing off too much about fixing the finances without actually doing it.
Osborne though is not expected to make any major changes to his policy. He can argue that his ‘Plan A’ of austerity measures is more important than ever, albeit with some tweaks.
And economists aren’t making big changes to their economic forecasts, pencilling in more of the same: quantitative easing, a weaker pound and above-target inflation.
But political instability in turn creates economic doubt, especially as we get closer to the 2015 election. What will be the commitment to austerity then?
Next: Will inflation rise further?
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