Fitch downgrades UK credit rating to AA+

Chancellor George Osborne insists the UK economy "is healing"

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The Fitch credit ratings agency has downgraded the UK to AA+ owing to a weakened economic outlook.

The move, after Moody's downgrade in February, came as Chancellor George Osborne defended the government's austerity plan.

Fitch said its downgrade primarily reflected a weaker economic and fiscal outlook.

Mr Osborne has said his was the "right plan" and that the economy was "healing".

Fitch said its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned its outlook to "stable", removing the threat of further rate action in the near term.

Ed Balls, Labour's shadow chancellor, said: "This is another humiliating blow to a prime minister and chancellor who said keeping our AAA rating was the number one test of their economic and political credibility.

"And it ends a disastrous week for George Osborne's economic policy after the IMF downgraded its UK economic forecasts again and warned Britain needs a plan B for jobs and growth," he said, referring to a report issued by the International Monetary Fund earlier this week.

In its twice-yearly World Economic Outlook published on Wednesday, the IMF slashed its forecast for growth to 0.7% in 2013 after saying in January that the country's economy could expect 1% growth.

'Stark reminder'

Moody's became the first major agency to downgrade the UK's sovereign debt rating in February, although Standard & Poor's reaffirmed its AAA rating earlier this month.

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What matters is not what the IMF or Fitch are saying about the UK, but the economics behind it. ”

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Regarding the latest downgrade from Fitch, the Treasury said: "This is a stark reminder that the UK cannot simply run away from its problems, or refuse to deal with a legacy of debt built up over a decade.

"Fitch themselves say the government's 'continued policy commitment to reducing the underlying budget deficit' is one of the main reasons UK debt now has a 'stable' outlook.

"Though it is taking time, we are fixing this country's economic problems. The deficit is down by a third (since 2010), a million and a quarter new private sector jobs have been created and the credibility we have earned means households and businesses are benefiting from near record low interest rates."

Time to consider?

IMF delegates visit the UK next month for annual consultations that allow it to monitor member countries and issue recommendations about economic policy.

Some IMF officials have recently raised doubts over Mr Osborne's strategy.

Managing director Christine Lagarde told the BBC's HardTalk programme: "With this medium-term strong anchoring of fiscal consolidation, the pace has to be adjusted depending on the circumstances and given the weak growth that we have observed lately because of reduced demand addressed to the economy, now might be the time to consider.

"But we want to have the dialogue. I don't think it's fair on any of our members... to actually pass a final judgement, and the words used matter and the grammar that is applied to words matters so when we say 'may consider', we are opening the door.

"But now is the dialogue," she said, referring to the IMF's upcoming visit to the UK.

Her comments were in line with those made by IMF chief economist Olivier Blanchard earlier in the week, when he warned that Mr Osborne was "playing with fire" if he continued his current strategy.

But the chancellor is sticking to his plan, saying he would defend his case when the IMF officials visit.

"Britain's got the right plan in terms of dealing with its deficit," Mr Osborne told the BBC, speaking before Fitch published its report.

"We've got a plan that gives us credibility in the world and enables us to borrow at very low interest rates.

"It's also a plan that has demonstrated flexibility, so as we've had problems, for example in the eurozone, we've been able to adjust to the impact of that.

"I think that the British economy is healing, and confronting the problems built up over many years."

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