LONDON (Reuters) – UK finance minister Rishi Sunak on Wednesday said there would be no changes to the outdated Retail Price Index before 2030, to boost inflation-related government bondholders.
In 2013, British statisticians said the measure was overestimating inflation, and have since urged the government and the public to use measures based on the Consumer Price Index, which is usually about 1% lower a year.
But the RPI remains widely used not only to calculate interest payments on 343 billion pounds of index-linked bonds but also for student loans and annual rail rate increases, some pensions and many commercial contracts.
Because of the RPI’s role in the bond market, statisticians need permission from the finance ministry to make any changes that take effect before 2030.
Bond prices linked to short and medium term inflation surged on news of the delay. The real yield on bonds linked to the main 10-year index fell 9 basis points, representing the biggest daily price increase since September 8.
Last year, the UK Statistics Authority requested permission to recalculate the RPI to be in line with CPIH, a CPI measure that includes an estimate of the cost of additional housing.
The UK finance ministry said last year it would consider implementing reforms between 2025 and 2030, which would lower interest payments to bondholders.
But on Wednesday, Sunak said a change to the RPI would be too disruptive for bond investors, with Britain raising a financial record 485.5 billion pounds this year, of which 33.2 billion pounds will be in gilts on the index.
“I will not be able to offer my approval for the implementation of such a proposal before the maturity of the final specific index gold by 2030,” Sunak said in a letter to UKSA.
UKSA said it would change the RPI by February 2030, as soon as legally possible.
RPI critics say past failure to change it has effectively cost the public billions of pounds in extra interest payments on government bonds.
This is argued by bond investors who say that in recent years, the increase in the RPI rate has been a factor in the price of bonds when they are sold by the government.
Pension consultants Lane, Clark & Peacock said some pension funds will face deficits, even with changes pending.
“The schemes that have suffered the most are those that have invested heavily in index-linked government bonds and have increased returns in terms of CPI,” said LCP partner Jonathan Camfield.
Reporting by David Milliken; Edited by William James and Catherine Evans