U.K. Lawmaker Says Now Is Not Time to Switch to CPI-Linked Gilts

(Bloomberg) -- Now is not the time for the U.K. to switch away from oft-criticized bonds linked to the retail prices index as the move would be too costly and complex, according to Chief Secretary to the Treasury Liz Truss.

A sudden move from RPI-linked gilt sales to those tied to consumer prices would create fragmented demand, U.K. Debt Management Office Chief Executive Robert Stheeman and Truss said at a hearing of the Economic Affairs Committee on Tuesday. That risks pushing up the cost of issuance and leading to a reduced market for both forms of debt.

While the DMO has previously assessed the possibility of selling CPI-linked gilts, existing RPI linkers maturing as far out as 2063 could leave the U.K. with a dual system in which it is paying coupons on gilts tied to both inflation measures.

“One clear point of reference,” is needed by the market, Stheeman said. As demand for RPI-linked debt “heavily outweighs” that related to CPI, a sudden switch could potentially lead to a poorer price for the latter and hurt the public purse.

Yet the measure is gaining traction elsewhere in bond markets. Last month Cambridge University issued 300 million pounds ($398 million) of CPI-linked notes.

In recent years U.K. economists have increasingly urged a move away from RPI, which some statisticians say overstates the true rate of inflation. Last year the Office for National Statistics’ Head of Consumer Price Inflation James Tucker described it as “not a good measure,” saying he doesn’t recommend its use.

Although the Bank of England targets CPI and the government switched to that gauge to determine increases to state benefits and public-sector pensions in 2011, RPI remains linked to rail fares, student loan interest rates and many private pension payments.

©2018 Bloomberg L.P.