MNI SOURCES: Brexit Chaos Behind RPI Reform Delay

--RPI Revamp Caught Up In Brexit Mire

By David Robinson and Les Commons

     LONDON (MNI) - A Lords committee has had no word from the UK government on

when it will deliver promised proposals to deal with the outdated retail price

index inflation measure, with two people with knowledge of the matter blaming

the delay on government paralysis caused by Brexit.

     After a sharply critical report from lawmakers in January, which called on

the authorities to stop issuing new RPI-linked bonds and to settle on a single

general measure of inflation, Chancellor of the Exchequer Philip Hammond stated

in March that the Treasury was working with the UK Statistics Authority (UKSA)

and would publish a response in April.

     MNI understands that the Lords' Economics Affairs Committee has been given

no guidance as to when a response might come since April 30, when Hammond sent

it a public letter, stating that the issues raised over RPI were "complex and

wide ranging" and that the government was still discussing the matter with UKSA

and would respond as soon as it could.

     One lawmaker cited government paralysis, saying that no announcement was

likely before the next Brexit vote in June and probably not this side of the

summer parliamentary shutdown, saying: "we are the zombie parliament."

     Another official with knowledge of the process agreed that Brexit, which

has absorbed much of the government's energy, had disrupted decision-making on

the issue of RPI.

     A suggestion, floated in the media and echoed by City analysts, that the

delay may be linked to the retirement in June of John Pullinger, UKSA chief

executive and National Statistician, was greeted with scepticism by people close

to the process. Their understanding was that Pullinger wants to tackle the

long-running RPI saga himself rather than leave it in his successor's in-tray.

     There is a deep, liquid market in RPI-linked gilts dominated by pension

funds seeking to cover liabilities also tracking the index. Pay settlements,

train fares and student loans are adjusted according to the measure. It is also

far from clear the government will save money through reforms.

     Debt Management Office head Robert Stheeman, in evidence to the Treasury

Select Committee on May 8, was lukewarm at best about moving away from

RPI-linked gilts in favour of issuance based on another inflation gauge, such as

CPI or CPIH.

     While the idea of lowering interest payments by linking gilts to an

alternative might sound attractive, it is open to question how great the fiscal

benefits to the government would be. Investors would adjust by paying lower

prices for inflation-linked bonds and risk premia could be driven up because of

uncertainty over the way UK inflation will be measured.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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