(Updates with additional comments starting in second paragraph.)
Feb. 15 (Bloomberg) -- Bank of England Governor Mervyn King said Moody’s Investors Service’s warning this week that it may strip the U.K. of its top Aaa credit rating shows the government must continue with its deficit-reduction plan.
“It’s a reminder that we are facing a very challenging path to reduce the scale of our deficit so that, at some point, the ratio of national debt to gross domestic product can start to fall back again, which has to be the objective,” King said at a press conference in London today. The government has a “long-term plan” for the budget and “it’s very important that we keep to that.”
Chancellor of the Exchequer George Osborne fended off opposition accusations that he’s cutting spending too quickly after Moody’s put the U.K. rating on “negative outlook” on Feb. 13. Osborne says his approach has helped to maintain the rating, pushed gilt yields lower and given room for the central bank to loosen monetary policy.
Moody’s warning, which cited a “weaker macroeconomic environment,” carries a one-in-three chance of an outright downgrade and was part of a larger action which saw the company cut the debt ratings of six European countries including Italy, Spain and Portugal.
Still, recent rating reductions have done little to deter investors, who poured money into the government bonds of nations such as France and Austria even after the countries lost their top ratings at Standard & Poor’s last month.
“I don’t see any reason to ignore or get overly concerned about it just because it’s a rating agency,” King said today of the warning by Moody’s. “What we’ve been saying is that everyone involved in financial markets should try to rely less mechanically on what rating agencies say. But I don’t see any reason to dismiss this just because in the past rating agencies got things wrong.”
--Editors: Fergal O’Brien, Simone Meier
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