LONDON, Jan 30 (Reuters) - Britain should stop issuing new government bonds which pay returns linked to the discredited retail price index (RPI) within the next seven to 10 years, Bank of England Governor Mark Carney said on Tuesday.
RPI is used as the benchmark for British inflation-linked debt as well as most student loans and many commercial contracts. But the country's statistics agency has said it gives an unrealistically high picture of price growth.
RPI was 4.1 percent in December, compared with 3.0 percent for CPI, the inflation measure targeted by the Bank of England.
Asked if it was still right for the government to use RPI, Carney told members of a committee in Britain's upper house of parliament that it was time to stop.
New public-sector contracts should shift as soon as possible to using a more modern inflation index such as consumer price inflation, while changes to gilt issuance would need to be phased in over a longer period, he said.
"We're still issuing on RPI, and yes, there is a short-term argument that of course it's better to continue issuing on RPI," Carney told lawmakers.
"But we wouldn't want to be in the same position 10 years from now. In the end, you have to pick a date, and it tends to be, seven, eight, 10 years down the road, at which you will have transitioned off."
The United Kingdom Debt Management Office rejected a move to CPI from RPI in 2011 after consulting with gilt investors. Many British pension funds, a major group of investors in index-linked gilts, have RPI-linked liabilities. Other investors did not want to fragment the already illiquid index-linked gilt market by introducing another class of debt.
The DMO plans to sell at least 37 billion pounds ($52 billion) of index-linked gilts this financial year, about a third of total issuance.
Carney qualified his comments by saying the government needed to be sure which inflation measure to use for the long term before it makes a switch.
Britain's statistics authority has recently designated CPIH, a new version of CPI that includes more housing costs, as its preferred measure of inflation.
Carney said CPIH had too short a track record to be suitable for monetary policy purposes for now.($1 = 0.7079 pounds)
(Reporting by David Milliken, Andrew MacAskill and Alistair Smout; editing by William Schomberg)
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