Moody's rating agency backs George Osborne's plans to cut the budget deficit, saying the economy is strong enough to withstand the austerity measures

A leading credit-rating agency urged George Osborne to stick to his austerity plans yesterday as fresh evidence of weak bank lending to businesses and homeowners added to fears of a double-dip recession.

Moody's Investors Service said it was maintaining its top-notch AAA rating for the UK and warned that any political backsliding by the coalition could still lead to the downgrade feared by the chancellor.

But while the ratings agency expressed confidence that Britain was resilient enough to shrug off the impact of the biggest package of spending cuts since the second world war, sterling fell against the euro on the foreign exchanges as Bank of England lending data added to concerns that the growth prospects for the economy were deteriorating.

Threadneedle Street said lending to businesses had dropped for a fifth successive month, with small firms particularly hard hit by credit rationing. Meanwhile, the Council for Mortgage Lenders predicted a tough time for the property market after reporting that advances for home loans had fallen by 14% month-on-month to their lowest August level in 10 years.

Brian Murphy, head of lending at Mortgage Advice Bureau, an independent mortgage broker, said that the fall in lending – down 6% compared with August last year – would add to concerns about the health of the property market, where a number of recent surveys of activity and prices have pointed to a slowdown.

"A year ago we were in recession but the overall feeling was that we were leaving it," Murphy said. "Now, we are out of recession but the feeling in many corners is that we are heading back into it."

Yesterday's endorsement by Moody's came as a boost to Osborne, who has said repeatedly since becoming chancellor in May that action to tackle the UK's record peacetime deficit is crucial to avoid Britain's debt being downgraded. His political opponents have seized on recent downbeat reports from the housing market and the high street to argue that the mixture of spending cuts and tax increases planned by the coalition will hamper economic growth, making it more difficult to service the national debt.

Kenneth Orchard, Moody's lead analyst for the UK, said: "The global financial crisis of 2008-09 caused serious long-term damage to the British government's balance sheet. The country's economic outlook is also more challenging because private-sector deleveraging, the uncertain state of the financial sector and slower growth in the UK's main trading partners are not conducive to allowing GDP growth to return to its pre-crisis trend rate.

"Nevertheless, Moody's believes that the UK has the wherewithal and ability to meet these challenges whilst maintaining its AAA rating."

The ratings agency added that its "stable outlook" for the UK implied that there was no imminent prospect of a downgrade – a move that would potentially increase the cost of servicing the UK's debt. Its display of confidence in Britain was largely driven by the government's commitment to "stabilise and eventually reverse the deterioration in its financial strength". Moody's added that government debt was also well structured, while the UK economy appeared sufficiently flexible and robust to grow moderately, even against a backdrop of "austere fiscal consolidation".

Moody's said its AAA rating was based on a scenario that the economy would maintain a moderate pace of growth over the medium term, that the bulk of the work to restore the public finances to good health would be over by 2014, and that there would be only small additional costs incurred in restructuring the banks.

"However, the explosion in the government's deficit and debt metrics over the past three years has eroded the cushion that previously existed," Orchard said, as Moody's outlined a number of threats to the AAA rating. These included the risk that significantly slower economic growth, possibly caused by the private sector paying off debt or by weakness in Europe, and reduced political commitment to the tough budgetary plans would prevent debt levels from being stabilised.

The agency also said that a sharp rise in bond yields, possibly associated with higher inflation or a deterioration in market confidence, could have a negative impact on debt affordability. "Alternatively, renewed problems in the banking sector could force a resumption of official support programmes and indirectly cause larger government budget deficits, thereby exerting negative pressure on the AAA rating."

Responding to the £2.5bn drop in lending to business in July, Howard Archer, chief UK economist at IHS Global Insight, said: "The survey very much maintains concern that tight credit conditions are posing a significant obstacle to economic activity. This is even allowing for the fact that ongoing muted bank lending to companies is being influenced significantly by low demand for credit in addition to restricted supply.

"Lack of access to credit for smaller businesses is still a particularly worrying problem. With money supply growth also faltering further in August and the economy showing increasing signs of faltering, pressure is mounting on the Bank of England to revive quantitative easing."