Fitch Affirms UK at ‘AA-‘ with Stable Outlook
Fitch Ratings has affirmed the United Kingdom’s (UK) Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘AA-‘ with a stable outlook.
According to Fitch, the UK’s ratings are supported by its high-income, large, diversified, and flexible economy, a credible macroeconomic policy framework, and financing flexibility from deep capital markets and sterling’s status as an international reserve currency.
Ratings analysts said these factors are set against its high public and external debt, and a debt interest/revenue ratio that is more than double the ‘AA’ peer group median.
Fitch projects UK GDP growth will slow to 1.1% in 2026, from 1.3% in 2025, reflecting a weakening labour market, alongside more subdued investment.
“We project growth will quicken to 1.5% in 2027 as monetary policy easing feeds through to domestic demand, still below the ‘AA’ median of 2.6%.
“We assess potential growth at 1.4%, with moderate upside from faster progress on housing planning reform and sustained higher public capex, or from EU trade integration that goes further than is currently being negotiated”.
Ratings analysts said a sharper, sustained slowdown in migration following the tightening of visa and permanent residency requirements is a key downside to growth.
Fitch forecasts the general government deficit will narrow by 0.6pp in 2026 to 4.8% of GDP and by 0.5pp in 2027 to 4.5%, still above the current ‘AA’ median of 2.3%.
This reflects already-budgeted tax measures, which the Office for Budget Responsibility projects will lift tax/GDP by 1.3pp from FY25 (ending March 2026) to FY27, and a further 0.6pp in FY28-FY29, close to the next general election.
With tax/GDP set to rise to a historically high level, the scope to absorb fiscal shocks through further taxation is constrained, particularly given 2024 election pledges not to raise income tax, VAT, or National Insurance rates.
The rating agency projected deficit reduction through 2027 is about 0.5pp slower than government targets, reflecting slippage against plans to slow real-term growth in public sector spending to 1.2% in FY26-FY28 (and 0% in FY29), from 3.4% in FY24-FY25.
Fitch also assumes defence spending will rise more quickly to 2.8% of GDP in 2028, compared with the budgeted 2.6%. Analysts forecast general government debt will increase by 1.5 percentage points in 2026 to 103.8% of GDP, and by 0.7 percentage points in 2027, and more gradually thereafter.
Such high debt/GDP, more than double the ‘AA’ median of 49%, limits the scope for further fiscal slippage without leading to pressure on creditworthiness.
Greater pressure on Prime Minister Starmer’s position amid the government’s weak public approval ratings adds to the uncertainty around fiscal policy.
Some implementation risk was already evident in the reversal of planned welfare cuts in 2025, albeit mitigated by the government’s large parliamentary majority and the next general election not due for another 3.5 years, Fitch said.
Analysts noted the likelihood of a leadership change is uncertain, as are its potential timing and policy repercussions, including for fiscal rules, partly reflecting the lack of consensus over a successor. Fitch expects concerns over triggering markedly higher gilt yields will prevent sharp fiscal loosening.
The 2025 Autumn budget doubled the headroom above the minimum requirements to comply with its deficit rule, to 0.6% of GDP. However, this is still a relatively modest buffer, particularly given the series of exogenous shocks that drove a 17pp rise in public debt/GDP in 2019-2025.
The very low headroom prior to the budget led to particularly high speculation about potential new fiscal measures, which weighed on economic confidence.
The Autumn budget further underlined ratings analysts’ view that the Chancellor is more committed to the fiscal rules than her predecessors, under whom there were fairly frequent changes to the framework.
Fitch said the shortening of the rolling forecast horizon from five to three years from 2026 moderately reduces the scope to delay the actual fiscal adjustment needed to meet targets – a longstanding weakness of UK fiscal rules.
The credibility of plans has also been enhanced by their alignment with three-year Spending Reviews, which must be updated every two years.
Fiscal risks are mitigated by sterling’s status as a reserve currency, the UK’s deep capital markets, and the absence of FC debt.
The long average maturity of central government debt, of 13.7 years and the lower cost of inflation-linked debt (which accounts for 24% of the debt portfolio) limit the near-term impacts of relatively high gilt yields.
Fitch projects general government debt interest/revenue will be fairly stable, at 7.8% in 2027, but still well above the ‘AA’ median of 3.7%. Ratings agency said sustained higher-than-expected yields are a key risk to medium-term debt projections.
Fitch forecasts inflation to fall to 2.4% at the end of 2026 from 3.0% currently, on wage disinflation and lower administered prices, and to 2% at the end of 2027, consistent with the Bank of England’s target and close to the ‘AA’ median.
The ratings agency projects that the policy interest rate will be cut by 75 bp in 2026 to 3%, in line with the neutral rate. Oando Drops Hints on Tranche 2 Shares Distribution
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