Moody's has downgraded the UK's banking outlook from stable to negative, warning the UK economic growth will continue to be weakened by prolonged Brexit uncertainty in the next two years.

"A deteriorating operating environment weighs on banks' asset quality and profitability, and low interest rates and increased competition in mortgages reduce net interest margins of most UK lenders," Moody's said in a report on Tuesday.

"The UK's economy is weakening, making it more susceptible to shocks, and prolonged uncertainty over Brexit has reduced the country's growth prospects," said Laurie Mayers, Associate Managing Director at Moody's Investors Service.

The credit rating agency predicted the UK economy to slow to 1.2 percent in 2019, and 1 percent in 2020 and 2021 as the Brexit process curtails trade volumes and lowers investment.

"Our base case is that the UK and the EU will ultimately reach a free-trade agreement, but it is increasingly unlikely that any such deal will substantially mitigate the negative economic impact of Brexit," said Moody's.

The Bank of England's current base rate is 0.75 percent, above the benchmark rate for the euro area, but below the rate for the U.S. and other advanced economies. UK borrowers' ability to repay their debt is underpinned by persistently low interest rates, which also erode banks' net interest margins, Moody's said.

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