Britain suffered its first ever sovereign ratings downgrade from a major agency on Friday when Moody's stripped the country of its coveted top-notch triple-A rating, dealing a major blow to finance minister George Osborne.
Moody's said weak prospects for British economic growth, which have thrown the government's deficit reduction strategy off course, lay behind its decision to cut the rating by one notch to Aa1 from Aaa.
Austerity has been the watchword for Osborne's fiscal policy since his Conservative-led coalition came to power in 2010 after an election in which he vowed to defend Britain's triple-A rating, which can help keep down borrowing costs.
But a very slow recovery from the financial crisis has pushed back by at least two years the government's goal of largely eliminating the budget deficit by 2015's election.
The opposition Labour Party blames the deficit on too much austerity.
Nonetheless, Osborne insisted now was not the time to change course. His annual budget due on March 20 is expected to show a further deterioration in the country's fiscal outlook.
"Tonight we have a stark reminder of the debt problems facing our country and the clearest possible warning to anyone who thinks we can run away from dealing with those problems," he said in a statement. "Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."
However, the downgrade may fuel unease amongst members of his own party and his Liberal Democrat coalition partners that Osborne's gamble that he could slash the deficit and ensure a return to growth by the May 2015 election is failing to pay off.
Sterling fell by almost a cent to around $1.5160 after the downgrade, just off Thursday's fresh 2-1/2-year low, and analysts expected it to weaken further on Monday, even if many had seen a downgrade coming sooner or later.
"It's a pretty big deal," said Kathy Lien, managing director at BK Asset Management in New York. "We didn't see a huge reaction in the pound because it's late in the New York session. But you'll see some more aggressive selling when the markets open (in Asia) on Sunday."
Moody's said the outlook