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By David Robinson
LONDON (MNI) - UK authorities may announce an overhaul of the outdated
retail prices index Wednesday, in a move with broad implications for the
inflation-linked gilts market.
Despite parliamentary turmoil, the UK Statistics Authority and Treasury
said they would respond to lawmakers' call for RPI reform at 06:30 GMT, before
markets open. The timing of the announcement, and the broad consensus among the
technical experts that RPI is not sustainable in its current form, suggest that
the authorities intend to take action and not just kick the can down the road.
In January the House of Lords Economic Affairs Committee published a report
stating that the UK Statistics Authority may be breaching its statutory duties
by not correcting a well-known error in RPI and, despite getting officials to
work on the issue, former Treasury head Philip Hammond never delivered a
response. His successor, Sajid Javid, who took over in July, is now set to
respond to the report alongside the UKSA.
Inflation-linked gilts are based solely on RPI, but in 2013 the then
National Statistician acknowledged that the measure was flawed, that it
overstated inflation compared to other measures and did not meet the standards
required for a national statistic.
Despite that, the UK's index-linked gilt issuance has continued to be based
on RPI, delivering a windfall to debt holders, while student loan, train fares
and other items are also linked to RPI, boosting state revenues.
One block to reform has been Treasury concerns over the potential cost of
reimbursing gilt holders if RPI is reformed. The Debt Management Office has
highlighted the depth and liquidity of the RPI linker market and officials have
noted the potential hit to investor confidence if the UK altered the inflation
The Office for Budget Responsibility, however, knocked holes in the
argument that switching gilt issuance would be costly for the Treasury, stating
in a report published in July that interest payments on index-linked gilts in
the 2019-20 fiscal year alone would be stg3.1 billion lower if RPI were replaced
by a consumer price measure.
Top OBR official, and former Bank of England Deputy governor, Charles Bean
told MNI in an interview that the risk that such a switch might undermine
confidence among investors in UK government debt may also be overstated.
A possible response from Javid Wednesday may be to announce RPI reform and
to firm up plans to transition to a CPI measure which includes housing costs,
CPIH, as the government's headline measure. Javid could also announce plans for
CPI-linked issuance, although it would be a shock if he went as far as
announcing the sudden end of RPI linker issuance.
"The Government have no plans to stop issuing index-linked gilts indexed to
RPI, as the demand for RPI-linked debt is vast in comparison to CPI," Lord
Young, speaking for the Treasury, said in the House of Lords debate on RPI
reform on July 1.
--MNI London Bureau; tel: +44 203-586-2223; email: firstname.lastname@example.org
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