March 14, 2011 / 2:23 PM / 9 years ago

Risks to Britain's AAA outlook declining - Fitch

Office workers are seen in the London Place business district near Tower Bridge in central London February 9, 2011. REUTERS/Toby Melville

LONDON (Reuters) - Britain’s top-notch credit rating looks increasingly secure thanks to the government’s commitment to deficit reduction and a recovering banking sector, ratings agency Fitch said on Monday.

However, Fitch said there was a risk that inflationary pressures could spur a sharper-than-expected rise in interest rates which might hurt the economy.

“The strong budgetary consolidation effort and declining fiscal risks arising from the UK financial sector support the Stable Outlook on the UK’s ‘AAA’ ratings,” Maria Malas-Mroueh, Director in Fitch’s Sovereign team.

June gilt futures extended gains after the news to touch a contract high and the yield spread between 10-year gilts and Bunds touched its lowest since November 2009, while sterling also extended gains to touch a session high versus the dollar.

Fitch said the government’s deficit reduction plan was credible and it expected the March 23 budget to reaffirm the government’s commitment to fiscal tightening.

However, it noted that uncertainty over how much spare capacity remained in the economy as well as the pace of economic recovery had increased the potential for monetary and fiscal policy errors.

Inflation has been above the government’s target rate of 2 percent since December 2009 and Fitch said it expected inflation to average 4 percent in 2011 before falling back towards the target in 2012.

“There is a non-negligible risk that underlying inflation pressures, including from higher oil prices, result in a sharper ‘normalisation’ of policy interest rates than currently assumed with potentially adverse consequences for macroeconomic financial stability,” Fitch said.

Britain enjoys a triple-A rating from all three major credit rating agencies.

Reporting by Christina Fincher and David Milliken; Editing by Toby Chopra

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