September 4, 2019 / 7:01 AM / 14 days ago

UK to stick with RPI-linked bonds for now, plans changes from 2025

LONDON (Reuters) - British finance minister Sajid Javid said on Wednesday he had no current plans to stop the sale of inflation-linked government bonds which are based on a flawed measure of price growth, but changes would begin possibly as soon as 2025.

Britain's Chancellor of the Exchequer, Sajid Javid speaks with former students at SGS College Filton, where Javid himself studied, in Bristol, Britain, August 30, 2019. REUTERS/Toby Melville/Pool

More than a quarter of British government bonds, worth around 450 billion pounds, are linked to the Retail Price Index (RPI) which runs higher than other measures of inflation, meaning investors receive an estimated windfall of 1 billion pounds a year.

“I can confirm that the government has no current plans to stop issuing gilts linked to RPI,” Javid said in a letter to the chair of an economics committee in the upper house of Britain’s parliament which recommended changes earlier this year.

Javid said he recognised there were flaws in RPI but scrapping it now would “potentially be highly disruptive for the wide range of users of RPI” which could be damaging to the economy and the public finances.

He said the government was focused on Brexit for now but would launch a consultation about when to accept a recommendation by Britain’s statistics regulator to align the RPI with another measure of inflation, the CPIH, after 2025.

The government’s consultation is due to begin in January and a response will be published before the end of March.

Inflation-linked gilts were little changed in financial markets after the announcement.

“It’s disappointing that they are not leaving open the option of going earlier in the consultation but at least we are moving on from where we were,” David Norgrove, chair of the UK Statistics Authority, told Reuters after Javid’s announcement.

“This was always a very difficult decision to make. As always the gainers keep quiet and the losers shout very loudly,” he said.

Insurance firms are big buyers of index-linked bonds to help them pay private pensions that are linked to RPI, and they would have been losers from any immediate change.

But RPI is also widely used for setting annual increases in rail fares and student loan repayments, meaning commuters and students face higher increases than they would if the fares and loans were based on CPIH.

Norgrove said he had asked the government to stop using RPI in contracts when possible.

Reporting by Andy Bruce; Writing by William Schomberg; Editing by Catherine Evans

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