It is expected to bring RPI into line with CPI, tightening the spread between the calculations, which could cut RPI by up to 1%. This would have major implications for pension funds that hold index linked gilts slashing interest payments to them by reducing the break even rates on respective index-linked gilts.
Barclays have suggested that the government could save GBP 3.8bln next year on this change alone which has raised concerns in the markets that, on appearance, the inflation numbers have been 'adjusted' to pay out less interest which will be viewed negatively.
Once the ONS has made its recommendation the BoE will consider whether the change would be 'fundamental and materially detrimental to holders of relevant index-linked gilts'. If the BoE decides this is the case the decision will be passed to chancellor Osborne and could trigger an offer to redeem index-linked gilts above par which means investors will receive lower rates of interest and thus make linkers less attractive.
However, the high concentration of domestic holders of UK sovereign bonds may keep prices from dwindling too far, muting the downside effects of such a revision.
The ONS will apply any change along with the annual update to the RPI in inflation data published on March 19th.
Print 14:04, 09 Jan 2013 - Market Analysis - Source: RANsquawk
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