MNI POLICY: DMO Stheeman Backs Plans To Reduce Linker Issuance

-Stheeman: Sceptical Over Cost Benefits Of Moving To CPI Linkers

By David Robinson

     LONDON (MNI) - Robert Stheeman, Chief Executive, Debt Management Office

said that he fully supported the Treasury's plans to reduce inflation-linked

gilt issuance in testimony to the cross-party Treasury Select Committee

Wednesday. 

     He also highlighted the complexity of moving away from the current practice

of only issuing retail price index (RPI) linked gilts. 

     The following are key points from his testimony:

     - The UK is an outlier in inflation linked bond (linker) issuance, with

around 28% of the country's total debt stock in linkers while the US, by

contrast, has around 10%. 

     Stheeman said it was not a comfortable position for the UK to be in and he

backed reducing  the linker share.

     Last year, the Treasury stated that its aim was to gradually reduce linker

issuance and Stheeman stressed that this reduction would be gradual.

     "We don't want to frighten the investor base," he said, with linker

issuance in the DMO's latest remit down just 2 percentage points from a year

ago.

     "I very much agree with Treasury's line on this," Stheeman said.

     - Statisticians very largely agree that RPI is a poor inflation measure

which overstates the true level of inflation.

     The House of Lords Economic Affairs Committee issued a report calling on

the Treasury to move away from RPI linked issuance and for the Office for

National Statistics to reform the measure.

     The Treasury's response to the report, promised for April, is yet to

emerge.

     "The fact that response has been delayed is a sign that the government is

thinking extremely carefully, alongside the UKSA (UK Statistics Authority) about

what needs to be done," Stheeman said.

     - Stheeman is skeptical about the cost benefits of moving linkers from RPI

to another inflation measure, such as CPI or CPIH. 

     He said that "The reason we issue RPI, and only RPI-linked gilts, is not

because we at the DMO have a particular belief in RPI as a measure of inflation

(but because) .. that is what the demand is for," he said. 

     That demand comes from pension funds with hefty RPI linked liabilities.

     Before moving to CPI issuance Stheeman said that he would "want to have

clarity over the government's preferred measure of inflation first." 

     He expressed doubts about taxpayers getting any substantial saving from a

move to CPI issuance, as pricing would also reflect the lower inflation linked

interest payments.

     "The differential between RPI and CPI will reflect quite precisely (in the

price)," Stheeman said. 

     "We shouldn't think we will save money by issuing something like CPI

(linked gilts) .. We will also get a lower price," he said.

     -On Brexit, Stheeman said that gilt yields have been cushioned from the

risk of a disorderly Brexit because of market expectations about the likely

policy response from the Bank of England.

     Stheeman said that it was conceivable that gilt yields would fall rather

than rise in the event of a disorderly Brexit as "There is a sense that the

policy response coming from the Bank of England might be more accommodative."

     Conversely, if there were to be a UK political deal over the Withdrawal

Agreement or even a second referendum gilt yields could rise on the assumption

that policy would be tightened.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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