UK Keeps Strong Fitch Rating as Energy Pressures Threaten Growth and Inflation

Fitch has maintained the UK's sovereign credit rating at a healthy grade, though it cautioned that soaring energy prices will restrict economic growth and drive up inflation. The New York-based credit rating agency noted that the UK, Europe's second-biggest economy, retained its AA- rating due to its large, diversified, flexible, and high-income economy, versatile financial markets, and the pound's standing as an international reserve currency. An AA- rating stands as the fourth-highest on Fitch's scale, sitting just three notches below the top prime grade, which helps facilitate easier access to capital markets and funding when borrowing is needed.

However, higher energy prices—which remain volatile amid ongoing Middle East tensions and the Iran war—are projected to weigh on the UK economy. Real gross domestic product growth is anticipated to reach 0.9 per cent this year and 1.2 per cent in 2027, marking a slowdown from Fitch's February projections, alongside tighter funding conditions and a weak labour market. Despite the ripple effects of the Iran war, Britain's economy posted a surprise 0.3 per cent expansion in June. Fitch stated that risks to trend growth are balanced, supported by moderate upsides from faster progress on public investment plans, artificial intelligence adoption, or more extensive EU trade integration.

Meanwhile, inflation is projected to climb from a 2.6 per cent reading in June to 3.7 per cent by the end of the year, driven primarily by high energy costs, before retreating to 2 per cent by the end of 2028 in line with the central bank's target. Last month, the Bank of England kept its key interest rate at 3.75 per cent while warning that inflation would reach 4 per cent at the start of 2027. Fitch projects the same rate for the remainder of 2026, followed by a series of cuts reducing it to 3 per cent by 2028.

Fitch also highlighted Britain's credible macroeconomic policy framework, which is not anticipated to undergo substantial changes under Prime Minister Andy Burnham, who succeeded Keir Starmer last month. Analysts at Fitch remarked that they do not foresee significant near-term changes to fiscal rules or macroeconomic policy, aligning with statements from the new Prime Minister and Chancellor John Healey, though greater fiscal policy uncertainty may arise closer to the next election. As the UK's sixth prime minister in the past decade, Mr Burnham began his tenure facing questions regarding his economic management and fiscal discipline. Fitch analysts added that their expectation for fiscal policy to remain anchored largely reflects financial market constraints, as higher gilt yields could threaten the economic credibility of the new leadership.