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UK delays change to RPI inflation in boost for bond investors

11/26/2020 | 03:05am EST
Britain's Chancellor of the Exchequer Sunak outside Downing Street, in London

LONDON (Reuters) - British finance minister Rishi Sunak said on Wednesday there would be no change to the outdated Retail Prices Index of inflation before 2030, in a boost for holders of government inflation-linked bonds.

In 2013 Britain's statisticians said the measure overstated inflation, and have since urged the government and public to use measures based on the Consumer Prices Index, which is typically around 1% a year lower.

But RPI remains widely used not just to calculate interest payments on 343 billion pounds of index-linked bonds but also for student loans and annual increases in rail fares, some pensions and many commercial contracts.

Due to RPI's role in the bond market, statisticians need permission from the finance ministry to make any change that takes effect before 2030.

The prices of short- and medium-dated inflation-linked bonds surged on news of the delay. The real yield on the main 10-year index-linked bond tumbled by 9 basis points, representing the biggest daily price gain since Sept. 8.

Last year, the United Kingdom Statistics Authority asked to be allowed to recalculate RPI so that it falls in line with CPIH, a measure of CPI that includes extra housing cost estimates.

Britain's finance ministry said last year it would consider bringing in the reform some time between 2025 and 2030, which would lower the interest payments it makes to bondholders.

But on Wednesday Sunak said a change to RPI would be too disruptive for bond investors, from whom Britain is raising a record 485.5 billion pounds in finance this year, of which 33.2 billion pounds will be in index-linked gilts.

"I will be unable to offer my consent to the implementation of such a proposal before the maturity of the final specific index-linked gilt in 2030," Sunak said in a letter to the UKSA.

The UKSA said it planned to change RPI in February 2030, the soonest it is legally able to.

Critics of RPI have said the past failure to change it effectively cost the public billions of pounds in extra interest payments on government bonds.

This has been disputed by bond investors who say that in recent years the higher RPI rate has been factored into the bonds' price when they are sold by the government.

Pension consultancy Lane, Clark & Peacock said some pension funds would face a deficit, even with the delayed change.

"The schemes that will suffer the most are those that have invested heavily in index-linked government bonds and have their benefit increases linked to CPI," LCP partner Jonathan Camfield said.

(Reporting by David Milliken; Editing by William James and Catherine Evans)

By David Milliken

© Reuters 2020
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