The Bank of England Governor yesterday said that people should not be "overly concerned" by the threat by Moody's to strip Britain of its top notch credit rating. "I don't see a reason to ignore or get overly concerned about it just because it's a rating agency," said Sir Mervyn King.
Echoing the argument of George Osborne earlier this week, Sir Mervyn said that the warning underlined the need for the UK to bring its deficit under control. "I think 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 GDP can start to fall back again, which has to be the objective," he said.
The Governor did add, however, that it would be preferable if financial markets put less emphasis on the views of agencies. "What we've been saying is that everyone involved in financial markets [should] rely less mechanically on what rating agencies say. That's what we do in the Bank of England and it's what we'd like others to do as well."
On Monday Moody's put the UK on a "negative outlook", saying there is a 30 per cent change of a downgrade within the next 18 months, due to lower growth prospects.
The credit rating agencies were heavily criticised for giving top ratings to mortgage-backed securities in the boom that subsequently turned out to be worth very little. But Sir Mervyn yesterday said that their poor performance then did not mean they should be ignored now. "I don't see any reason to dismiss this [warning] just because in the past rating agencies got things wrong," he said.