Despite Moody's decision to place the UK's credit rating on negative outlook, the bond markets remain unmoved (see graph). The yield on ten-year UK gilts ended the day flat at 2.1 per cent. In other words, although its coveted AAA rating is now at risk, the UK is having to pay no more to borrow than before.

How to explain this apparent paradox? George Osborne would like you to think that it's due to his deficit reduction programme but the UK's low yields have more to do with monetary activism than fiscal conservatism. With its own currency and its own independent central bank, the UK can afford to keep buying up its own debt through the Bank of England's £350bn quantitative easing programme. As City AM editor Allister Heath notes in his column this morning, the UK "can never technically default. It can just print money in extremis." So long as the Bank continues to buy more gilts than the government issues, bond yields will remain at record lows.

As in the case of France and the United States, were the UK to lose its AAA rating, it would likely see no rise in its borrowing costs. For this reason, although a downgrade would be politically disastrous for Osborne, it would not be the economic calamity that some imagine. If the Chancellor had any sense, he would have taken advantage of the UK's low interest-rates long ago and borrowed to stimulate growth. As the Nobel Prize-winning economist Christopher Pissarides argued in our "Plan B" issue last October, "a small rise in gilt interest rates is a small price to pay for more jobs". Or as Tory MP David Ruffley said of a temporary VAT cut:

Even if we can't find the money for tax cuts from public spending savings, we could add it to the deficit and it is not going to send the markets into a tizzy, I don't think anyone really believes that. The markets will not go haywire if there was a modest loosening in borrowing in the short run if it was for the right reason.

Rather than appeasing the discredited rating agencies with yet more austerity, Osborne should finally devise a plan for growth.