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-Broadbent Sees Demand For CPI-Linked Gilts; RPI Switch Is A Political Challenge
By David Robinson
     LONDON (MNI) - Bank of England Deputy Governor Ben Broadbent said it would
make sense for the UK Treasury to issue new inflation-linked bonds using the
same price index as the one used for the central bank's target.
     Broadbent spoke before the House of Lords Economic Affairs Committee, which
is considering whether the retail price index, used by the government for
inflation-linked gilts and for adjusting some public sector prices, is an
appropriate measure.
     Here are main points from his appearance:
     --He stressed that RPI was a flawed inflation measure compared to the
bank's preferred consumer price index, and also to the CPIH gauge which factors
in housing costs, but said that moving beyond it was a task for the government.
     -- Broadbent said it "made sense" for the same inflation measure to be used
for index-linked gilts as for the BOE Monetary Policy Committee's inflation
target, which is based on CPI. He dismissed fears expressed by Debt Management
Office head Robert Stheeman that issuing CPI gilts risked creating fragmentation
in the UK inflation linked market.
     "I don't think it would be a permanently and costly fragmentation," he
said, saying that he believed that there would be demand for CPI-linked gilts,
with the private sector having already created various CPI swap contracts.
     -The RPI formula could be corrected. But if the Office for National
Statistics (ONS) did so the Bank of England would then have to determine whether
the change to RPI would be "materially detrimental to the interests of gilt
     - Broadbent said that if the switch away from RPI had been inconsequential
it would have been done by now. This chimed with views expressed by the Chief
Secretary to the Treasury, Elizabeth Truss, who previously told the committee
that if usage of the RPI were discontinued the Treasury would have to consider
the potential fiscal cost.
     Rail fares and interest on student loans are moved in line with RPI and
revenues could be hit if there was a switch to CPI while gilt borrowing costs
could, at least temporarily, rise.
     "It is a big political task for the government ... that is the constraint,"
Broadbent said.
--MNI London Bureau; tel: +44 203-586-2223; email:
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