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UK government's issuance of CPI-linked bonds 'inevitable', banks say

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UK - UK banks have “overwhelmingly” agreed that the government should provide bonds linked to the consumer prices index (CPI), according to a recent poll conducted by F&C.

Earlier this summer, the Debt Management Office (DMO) launched a number of consultations on the question of whether it should issue CPI-linked gilts.

F&C recently canvassed UK banks on the likely upshot of the consultation and found that responses were “overwhelmingly” positive.

F&C said other respondents had admitted to being undecided, but had nevertheless taken a “fatalistic view” on the “inevitability” of issuance.

The asset manager acknowledged that necessary consultation work and planning stages would delay any positive decision by the DMO to phase in CPI-linked debt.

But it added that there had been a precedent of the office “altering” the market -when it issued bonds linked to the retail prices index (RPI) with a three-month lag rather than the prior eight-month lag.

Nisha Khiroya, director and investment specialist at F&C, pointed out that the DMO had a “mandate” to issue debt in the most cost-effective way.

“This is the attraction of issuing CPI-linked gilts,” she said. “If pension schemes will pay a premium for greater precision of matching, the funding cost would be lower. Due to the increasing number of pension funds moving to a CPI basis, it is clear the demand could be there.”

The DMO’s recent consultations come in response to the announcement last year that public sector pensions would now be linked to the CPI rather than the RPI.

At the time, the government said the CPI was more stable for the lack of housing prices and more representative of inflation - as items can be added or removed from the basket as the year goes on.

What is more, the CPI is traditionally lower than the RPI - good news for pension funds in terms of liabilities.

The switch to the consumer price index was of great benefit to the BT Pension Scheme, which saw its deficit more than halved once the change had been taken into account.

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