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-UK DMO Head Stheeman, Treasury Minister Truss Wary Of Costs Of Move From RPI To
By David Robinson
LONDON (MNI) - On Tuesday Liz Truss, Chief Secretary to the Treasury, and
Robert Stheeman, chief executive of the Debt Management Office, gave evidence
to the Lords Economic Affairs Committee on the way forward for shifting away
from the retail prices index (RPI).
A hot problem for UK policymakers is that RPI is known to be intrinsically
flawed and is no longer an accredited official statistic. It is the reference
point for inflation linked gilts and many other contracts, including rail fares,
and there have been widespread calls to stop issuing RPI linked bonds and
attaching contracts to it.
Here are five things we learnt from the evidence of Stheeman and Truss:
-Truss acknowledged that RPI is far from ideal, saying "It is not our
preferred measure, it is statistically imperfect" but both she and Stheeman
highlighted the potential costs of switching away from it.
-"The government policy is to move from RPI to CPI but not if there is an
economic cost to doing it," Truss said.
"We are not at a point where there are obvious economic benefits" to
switching to CPI, for gilt issuance or other contracts, she added.
-DMO head Stheeman highlighted the potentially increased cost of issuing
inflation linked gilts based on CPI rather than RPI.
He said that the inflation linked market would become fragmented and that
fragmentation would come at a cost. This is because the DMO aims to build up the
size of various maturities of gilts and to decrease the liquidity premium and
this beneficial effect could be diminished if issuance was divided between CPI
and RPI gilts.
-Both Truss and Stheeman were asked about the comments of Governor of the
Bank of England Mark Carney, who told the committee back in January that "it
would be better not to further embed RPI. It would also be better ... to move
towards indexing contracts around a single preferred measure of inflation."
Carney advocated picking a target date, seven, eight or 10 years down the
road, to transition off RPI.
Stheeman said he did not disagree and that as demand for CPI gilts picked
up "we should be issuing that type of gilt" but he stressed that the DMO would
have to keep servicing existing RPI linked gilts while Truss again noted the
lack of economic benefits.
-A key take away was that neither the Treasury nor the DMO is any rush to
move to CPI. Truss made the point that if rail fares, for examples, were hiked
by CPI not RPI the lost revenue would have to be replaced from elsewhere.
The neatness of moving to a single measure of inflation is trumped, in the
Treasury's eyes, by the lack of benefit to the public finances in doing so.
--MNI London Bureau; tel: +44 203-586-2223; email: firstname.lastname@example.org