City says timing wrong in Moody's UK rating threat

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Shares edged lower and oil prices fell after Moody's announcement caught markets off-guard, although the key benchmark - the UK's cost of borrowing for 10 years - remained virtually unmoved at 2.1%.

Investec chief economist Philip Shaw said: "It was a surprise although the ratings agencies have been talking about the UK's vulnerability given that the deficit remains very high. But it seems to coincide with a bit of an upturn for global economy compared with where we were a few months ago."

IHS Global Insight's Howard Archer added that the Chancellor looks set to undershoot the Office for Budget Responsibility's £127 billion deficit target this year. "The recent news on the public finances has been stronger although this may be Moody's sending out a general message."

Moody's blamed a weak recovery, high debts and the nation's exposure to the eurozone debt crisis as it put the UK on "negative outlook" for the first time. This implies a one in three chance of a downgrade.

The decision comes after a 0.2% slide in growth in the final quarter of 2011, although economic signs since then have been more upbeat, particularly for manufacturers and the all-important services sector.

The European Central Bank, meanwhile, eased fears of a credit crunch among European banks by pumping almost 500 billion (£419 billion) into the financial system in December.