UK statistician unexpectedly rejects inflation index change
By David Milliken and Olesya Dmitracova, ReutersLONDON -- Britain's top statistician unexpectedly decided against major changes to the country's longest-running inflation index on Thursday, rejecting a move that could have significantly cut government borrowing costs.
January 11, 2013, 12:48 am TWN
Jil Matheson, the government's top statistical adviser, concluded that the existing Retail Price Index (RPI) did not meet current international standards. But she said it would be better to create a new index rather than fundamentally change RPI, which is written into many existing contracts.
The news is a major boost to the many Britons with company pensions legally linked to RPI, and to holders of Britain's inflation-linked government debt, as some of the proposed changes would have led to much lower future increases in payments.
Sam Hill, a fixed income strategist at Royal Bank of Canada, said he was highly surprised by the move, which came after months of consultation by the UK Statistics Authority.
“I think it's remarkable that they have said that the current formula does not meet international standards, and then continue to use it for a number of key functions,” he said.
Some economists had estimated Britain's finance ministry would have saved up to 3 billion pounds a year in interest payments if the change to RPI had gone ahead, out of annual debt servicing costs of 47 billion.
This would have been a boon for cash-strapped finance minister George Osborne, but after the decision by the UK Statistics Authority, his ministry confirmed that it would use RPI for future index-linked gilts as well as existing ones.