MNI Policy: BOE Broadbent: Case for Switch To CPI Linked-Gilts

-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

holders."

     - 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: david.robinson@marketnews.com

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