Fitch confirms UK's AA- rating, acknowledges its economic flexibility but high debt levels

Investing.com - Fitch Ratings confirmed the UK’s long-term foreign currency issuer default rating at AA-, with a stable outlook on Friday. The rating reflects the UK’s status as a high-income country with a large, diversified, and flexible economic system, a credible macroeconomic policy framework, and the financing flexibility provided by deep capital markets and the British pound’s status as an international reserve currency.

Fitch expects UK GDP growth to slow from 1.3% in 2025 to 1.1% in 2026, reflecting a weakening labor market and more subdued investment. The agency forecasts that as the impact of monetary policy easing on domestic demand gradually materializes, growth will accelerate to 1.5% in 2027, but still below the AA median of 2.6%. Fitch assesses the potential growth rate at 1.4%, with a sharper and more sustained slowdown in immigration after the tightening of visa and permanent residence requirements being a key downside risk.

The broad government deficit is expected to narrow by 0.6 percentage points to 4.8% of GDP in 2026, and to 4.5% in 2027, still above the current AA median of 2.3%. The Office for Budget Responsibility projects that tax revenue as a share of GDP will rise by 1.3 percentage points from fiscal year 2025 to 2027, and further increase by 0.6 percentage points in fiscal years 2028-2029. Fitch forecasts that broad government debt will increase by 1.5 percentage points to 103.8% of GDP in 2026, reaching 104.7% in 2027, more than double the AA median of 49%.

Amid weak public support for the government, Prime Minister Starmer’s position faces greater pressure, increasing fiscal policy uncertainty. The planned welfare cuts in 2025 have been withdrawn, showing some implementation risks, but the government’s large parliamentary majority and the three-and-a-half years until the next election somewhat mitigate this risk. Fitch expects concerns about triggering sharp rises in bond yields to prevent a rapid easing of fiscal policy.

Fitch forecasts inflation will decline from the current 3.0% to 2.4% by the end of 2026, aided by falling wage inflation and easing prices, and will fall to 2% by the end of 2027, in line with the Bank of England’s target. The agency expects the policy rate to be lowered by 75 basis points to 3% in 2026, consistent with a neutral rate. The average maturity of central government debt is 13.7 years, and the lower cost of inflation-linked debt limits the impact of relatively high bond yields in the short term.

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