MNI POLICY: Pressure To Mount If UK RPI Reform Delay Drags On

By David Robinson

     LONDON (MNI) - UK lawmakers will pressure the Treasury to respond to a

parliamentary report calling for root and branch reform of the Retail Price

Index, after the government missed a self-imposed end-April deadline for a move

which could prompt a repricing of the inflation-linked bond market.

     Chancellor of the Exchequer Philip Hammond published a letter to The House

of Lords Economic Affairs Committee on Tuesday evening stating that the issues

around RPI reform were "complex and wide ranging" and that it would respond as

soon as it could. While lawmakers could tolerate a short delay, they would press

Hammond to explain anything more protracted.

     In his March Spring Statement, Hammond said the Treasury would respond in

April to a string of recommendations made by LEAC to the government and the UK

Statistics Authority on reforming and eventually moving away from the flawed RPI

measure.

     Hammond's letter to LEAC only arrived after it had completed its meeting on

Tuesday, and lawmakers have yet to agree any response.

     In February LEAC and the cross-party Treasury Select Committee, comprising

lawmakers in the lower chamber House of Commons, published a joint letter to the

head of UKSA describing continued use of RPI as "ridiculous".

     RPI is regarded as persistently overstating inflation, but reform could be

costly for the Treasury. Some index-linked gilts allow enforced redemption if

changes to the RPI materially prejudice holders. Re-defining RPI could also harm

investor confidence.

     "The government's worry ... is that if there is going to be a re-definition

which has the effect of saving taxpayers money it will tend to raise the risk

premium on indexed stock because people might think that something like that

could happen again," former Bank of England Monetary Policy Committee member and

national statistics adviser Martin Weale said in a previous MNI interview.

     The UK's stock of index-linked debt stood at some STG426 billion at the end

of last year, 26% of the government's debt portfolio. Any change in the way RPI

is calculated would likely lower the headline rate, resulting in losses for gilt

holders.

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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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