MNI INTERVIEW: UK RPI Change To Rejuvenate IL Market: DMO Head

The UK's index-linked government bond market should be revitalised rather than killed off following the announced realignment in 2030 of the main measures of consumer price inflation, Robert Stheeman, head of the Debt Management Office, told MNI.

In 2030, the UK Statistics Authority (UKSA) will abruptly bring the RPI index into line with that of CPIH, when the two matched indices could still run side-by-side, allowing issuance of the current RPI-linked bonds to continue.

Now this methodological realignment date is known, it has "given the market confidence," Stheeman said.

"I would expect market activity to pick up. Our index-linked issuance is also picking up, albeit slightly constrained by the fact that we have only got four months left of the financial year," he added.

In percentage terms, the DMO 's new issuance schedule revealed it will issue more index-linked gilts in the next four months than it has as a proportion of issuance so far in 2020-21.

PREMATURE TO DISMISS

Stheeman questions the assumption of some that RPI -- and therefore RPI-linked bonds -- will become redundant after 2030.

"Now, if you have a reformed RPI it's not immediately obvious to me why it then becomes a redundant measure of inflation," he said

"If the problem was the methodology of its calculation and that problem is being addressed by changing the methodology, I just pose this as a rhetorical question, why would anyone automatically assume that a reformed RPI is a moribund index?" Stheeman added.

The schism between CPIH and RPI supporters has been fuelled by the fact that while many statisticians see CPIH as a more accurate measure of inflation, RPI usage has become entrenched.

"Both could continue to run alongside (each other) for a long time," Stheeman said.

NO SWITCH

The DMO is certainly in no hurry to start replacing RPI issuance with CPIH issuance.

"We currently do not have any plans to issue them … Right now, as I am speaking today, there is probably less end investor demand for CPIH products than there is for RPI ones. What happens, though, in the future. That is the really interesting question," Stheeman said.

GREEN BONDS

Stheeman also confirmed the DMO is committed to launching an inaugural green bond, then working with the Treasury to develop a 'green curve'..

"How long it takes to build up that curve up, if we want to have large liquid benchmarks, depends on many things some of which are largely outside of the DMO's control, not least having sufficient number of projects which can be funded through issuance of liquid bonds required to build that curve," he said.

"We plan to issue one in 2021, at this stage I don't know the precise timing," Stheeman added.

On Brexit, with the deadline looming for a deal, Stheeman takes heart from how gilts have appeared Brexit-proofed so far.

"One of the perhaps surprising things in the entire Brexit debate over the last four or five years is that the gilt market has not appeared demonstrably to be impacted in any significant way, regardless of whether the news is deemed by some to be good or not so good," he said.