Philip Aldrick, Economics Editor
The Times
Mark Carney, the Bank of England governor, said RPI had “known errors” and should be phased out over the next decade
Mark Carney, the Bank of England governor, said RPI had “known errors” and should be phased out over the next decade
Mark Carney has called for the government to scrap the retail prices index of inflation used to set the interest rate on student loans, rail fares and on £400 billion of government debt because it has “known errors”.
The Bank of England governor is the most senior figure to suggest abolishing RPI since the Office for National Statistics revealed five years ago that there was an error in the equation used to produce the monthly figure.
A change could save taxpayers £5 billion in lower interest on the national debt every year, equivalent to about a penny off income tax. Commuters and students would also be spared higher rail fares and loan costs.
Economists and campaign groups have been calling for the inflation index to be changed since RPI was stripped of its national statistic status in 2013 for falling short of international standards. The ONS estimated that a bias in the equation meant that RPI was being overstated by 0.6 percentage points.
Mr Carney said “most would acknowledge [that RPI] has no merits” and “it would be better not to further embed RPI in contracts”. Moving to a new system could take “seven, eight, ten years” to give markets time to adjust, but he added: “We would not want to be in this position ten years from now.”
He also suggested that the consumer prices index or its alternative version, the CPIH, replace RPI. Mr Carney said: “It would be helpful to have just one public-facing cost of living measure.”
CPI is currently 3 per cent, CPIH is 2.7 per cent and RPI is 4.1 per cent. If RPI was replaced by CPIH, it would imply a £5.5 billion annual saving on the £400 billion of index-linked gilts.
The Campaign for Better Transport has calculated that commuters to London from a dozen cities would have saved £200 on average had rail fares been updated by CPI since 2014. Student loans are charged at 6.1 per cent because of the added RPI, even though the Bank’s interest rate is 0.5 per cent.
Any change would have to be handled sensitively because many holders of index-linked gilts are pension funds that are managing the retirement savings of millions of people.
Ultimately, abolishing RPI would be a decision for the chancellor. Mr Carney told the Lords economic affairs committee that wages were picking up and “there is a prospect of a return of real income growth later this year”. He added that the strength of the global economy and certainty about Brexit would release business investment in 2019. The upbeat comments suggest that the Bank may signal that an interest rate rise is imminent in its economic outlook next week.