巴黎银行-港股-投资策略-英国RPI改革报告：利率市场影响-20190118-7页_1mb

UK RPI Reform Report – Rates Market Implications Summary

Core Content

The UK Economic Affairs Committee (EAC) has released a report evaluating whether RPI (Retail Price Index) is an appropriate measure of inflation. The findings of this report are significant for the index-linked gilt market and have implications for the pricing of inflation-linked bonds and long-term interest rates.

Key Findings and Recommendations

• Clothing Component Reform: The EAC recommends reforming the methodology for collecting and calculating clothing prices in RPI. This change could reduce RPI inflation by 0.3 percentage points, which would have a measurable effect on the breakeven inflation curve.

• Criticism of UKSA: The UK Statistical Authority (UKSA) has been criticized for not updating the RPI calculation or correcting the clothing component. The EAC has warned that this could breach the statutory duty to maintain the integrity of official statistics, and highlights the unfair costs and windfall gains caused by the current policy.

• Single General Inflation Measure: The EAC suggests that the UKSA and government should agree on a new single general inflation measure within five years. This could be a reformed RPI, which would be closer to CPI (Consumer Price Index) in terms of accuracy and relevance.

• Transition to New Index: Once the single general measure is chosen, the government should issue inflation-linked gilts indexed to it. In the interim, the report suggests that CPI-linked gilts should be issued instead of RPI-linked ones. However, the UK Debt Management Office (DMO) may delay this transition, preferring to maintain RPI until the new measure is ready, to avoid creating a three-tier index-linked bond market with associated illiquidity costs.

• Impact on Defined Benefit Pension Funds: A lower RPI trajectory could reduce defined benefit (DB) pension liabilities, thereby lowering deficits and eroding demand for long-duration bonds. This aligns with the strategy of paying long-dated GBP forwards versus receiving USD forwards, as noted in the document.

Market Implications

• Breakeven Inflation Curve: Following the EAC report, index-linked bond breakevens fell by around 10bp across the curve. However, markets may be cautious due to the lack of substantive change in past RPI reform consultations, and thus limit the downward move in breakevens.

• Brexit Impact: Ongoing Brexit developments, particularly the possibility of an Article 50 extension and a second referendum, are expected to maintain downward pressure on breakevens. This is due to the likely rally of the pound and uncertainty surrounding the UK's exit from the EU.

• Short Maturity Breakevens: Shorter maturity breakevens, such as the 5y RPI, are seen as overvalued versus fundamentals. The document estimates that they are 5–10bp rich, suggesting short UK inflation positioning remains favorable.

• No-Deal Brexit Scenario: In the event of a no-deal Brexit, breakevens could rise significantly, potentially reaching previous highs (e.g., 25bp higher in 10y breakevens). This scenario would increase inflation expectations and market volatility.

Market Outlook

• The report supports the continuation of short UK inflation positioning due to the positive carry expected in the short end of the curve.

• The EAC’s findings indicate that RPI reform could lower breakevens across the curve by at least 30bp, but market skepticism may prevent a more substantial move, especially given the lack of prior action.

• Long-term impact on pension liabilities and bond demand is anticipated, but immediate market reactions may be limited due to historical inertia and uncertainty.

Additional Context

• The document is a non-independent research communication from BNP Paribas and is intended for professional clients and eligible counterparties under MiFID II.

• It includes disclosures regarding potential conflicts of interest, marketing communications, and legal disclaimers. The report may also contain hypothetical performance data and is not investment advice.

• The U.S. disclosures note that options and ETFs discussed are not suitable for all investors, and some securities may not be registered under U.S. law, making them restricted securities.

Conclusion

The EAC report on RPI reform is a key development in the ongoing debate over the inflation measure. While it suggests significant changes to RPI, the market may not react strongly due to previous inaction. The report supports a shift towards CPI-linked gilts and reforms in the long run, but short-term positioning remains favorable. Brexit-related uncertainty continues to influence inflation expectations and breakeven pricing.