Inflation-proofed government bonds (gilts) were given a boost yesterday after the Office for National Statistics ruled out a change in the method of calculating the Retail Prices Index that would have slashed interest payments to investors by billions of pounds every year.
The yields of 10-year index-linked gilts – whose coupon payments are structured to protect holders from the impact of RPI inflation – fell by about 35 basis points as traders responded to the surprise move.
The ONS established a consultation two years ago on whether to change the mathematical formula for calculating the RPI. Many analysts had expected it to tweak the index this week, which would have had the effect of reducing the recorded rate of RPI inflation. Jil Matheson, the National Statistician, admitted that the existing RPI formula does not meet international statistical standards, and said the ONS would, from March, publish a superior index called RPIJ, expected to reflect lower cost-of-living rises. However, Ms Matheson added that there was "significant value" in leaving the existing RPI calculation untouched for the sake of bond holders, and continuing to publish the index every month. The Treasury confirmed yesterday that existing holders of the £350bn index-linked bonds in the market would continue to receive coupons linked to RPI.
But the Government failed to make a similar commitment to maintain an RPI link for other policies, such as the regulation of train fare increases, rises in fuel duty and student loan interest rates. This means ministers could start using the lower RPIJ measure in these areas in future, potentially easing the financial squeeze on rail passengers, students and motorists by 1 per cent a year. There were signs last night that lobby groups will press for such a shift. "Anything that better reflects the cost of living to families should be used to calculate increases in fuel duty," said Luke Bosdet, an AA spokesman.
The Bank of England kept its £375bn quantitative easing programme on hold yesterday despite fears of a triple dip recession.