The bank says the UK’s rating outlook is less secure than seems to be generally assumed. Gilt strategist Mark Schofield says: “The uninformed view is that the pre-Budget report was a non-event and that it leaves us no nearer or further from a ratings change. However, in our view the pre-Budget report leaves us significantly closer to a negative ratings action by virtue of having done nothing to slow the current pace of deterioration in the fiscal position.”
Citibank says the ratings agencies assume the UK will be able to issue inflation-linked gilts at close to zero real yields and will have a strong demand for gilts, albeit boosted by the asset purchase facility, but it doubts whether this is achievable as the Government looks to raise around £16bn a month amongst investors cautious of the UK’s long-term prospects.
The other assumption that the ratings agencies make is that the UK will have stable public office making stringent fiscal decisions. Citibank says without this the UK will certainly lose its AAA rating.
Schofield says: “We agree that a majority Conservative government would likely initiate a sizeable fiscal tightening quite quickly. However, a hung parliament is becoming a very real threat; indeed three of the past five opinion polls suggest it is becoming a high probability risk. The issue is not so much one of disagreement over the need to enforce fiscal restraint but the fact that the parties are so diametrically opposed in their stance on how such policy should be executed.
“Under a hung parliament we see little prospect of a credible fiscal retrenchment and that, against a backdrop of rising yields and an exit from quantitative easing could very quickly change the ratings agencies assessments of the UK’s creditworthiness.”