BRITISH Finance Minister George Osborne said he would not flinch from his austerity drive, despite increasing pressure to change course after the loss of the country's 'AAA' credit rating and with elections approaching in two years.

Moody's dealt Britain its first sovereign rating downgrade on Friday, saying the US$2.5 trillion economy faced years of more sluggish growth and debt would continue to rise until 2016.

Economically the one-notch cut will have limited importance - most of Europe, Japan and the United States have already suffered the same fate, and Britain continues to borrow at historically low rates.

But politically it is toxic for Osborne, who has repeatedly vowed to protect Britain's top credit rating since the 2010 election campaign.

Osborne said yesterday the move by Moody's showed he was right to focus on restoring Britain to fiscal health, which he said was the only way to get growth going again.

"We've had a stark reminder this weekend of the single most important truth about our economy. Britain has a debt problem, built up over many years, and we have got to deal with it," the 41-year-old Chancellor of the Exchequer wrote in a column for The Sun newspaper.

"If we don't deal with it, interest rates will soar, homes will be repossessed and businesses will go bust. If you doubt whether that's true, just look at what happened to all those European countries now deep in recession."

For investors, the downgrade underscores Britain's predicament: a debt-ridden, stagnating economy that has kept bond yields low in large part thanks to the Bank of England becoming the world's biggest investor in UK government debt by purchasing it with newly printed money.

A top official with a leading investment firm said the ratings blow was in part self-inflicted by the Conservative-led government, which had room to ease off on its belt-tightening.

"The coalition set out trying to please the ratings agencies, but the inflexible application of front-loaded austerity is partly to blame for the lack of growth that led Moody's to downgrade (the UK)," said Trevor Greetham, asset allocation director at Fidelity Worldwide Investment, which managed over US$240 billion in funds as of December 31.

Osborne can take comfort from Moody's confidence that his austerity plan would eventually "reverse the UK's debt trajectory."

A Treasury official noted Moody's had given the UK's credit rating a stable outlook, meaning little chance of a further downgrade in the next 12-18 months.