Interest rates impacting debt costs slower in UK than any other G7 country
Issuing index-linked gilts was also said to ‘underline the government’s stated commitment to low and stable inflation, reducing investors’ perception of inflation risk and hence the yields they seek on nominal gilts’.
Published alongside the OBR's Autumn Statement forecast, the report said that the UK's refinancing costs and debt servicing costs were impacted «more slowly» than any other G7 country. This was due to its history of issuing a high proportion of long-dated gilts.
The assets lowered annual refinancing needs and reduced exposure to interest rates, «all else equal», the report said.
However, this did not mean this method of debt management was without risk, as the FRS addressed the sensitivity of the consolidated public finances to rising interest rates had increased due to quantitative easing by the Bank of England.
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The government said the average maturity of the total stock of gilts was «significantly higher» than other G7 countries, even after adjusting the UK figure for the impacts of QE and without applying any QE adjustment to other countries which will also face significant QE effects.
On the current trajectory, the government said the effect on maturity was «now unwinding» as QE eases, «which will increase the UK's effective debt maturity, all else equal».
The UK's allocation to a relatively high share of index-linked debt was also noted in the FRS, which was analysed on a balance of cost-effectiveness and overall risk.
The FRS said there were savings benefits for taxpayers using this asset. For pension funds, it prevents them from having to pay a premium for inflation protection compared to nominal gilts.
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