Guide

Methodology for Risk-free Discount Rates and CPI Assumptions for Accounting Valuation Purposes - Updating the Nominal Risk-free Yield Curve and the Short Term CPI Assumptions - December 2015

The purpose of this paper is to document an update of the nominal risk-free yield curve and a change in the way the short term CPI assumptions are determined.

Table of contents

  • 1 Introduction
    • 1.1 Overview of the methodology
    • 1.2 Review of the Methodology 2013
    • 1.3 Ongoing reviews and proposed changes
    • 1.4 Scope of this document
  • 2 Updating the nominal risk-free yield curve
    • 2.1 Approach
    • 2.2 Results
  • 3 Updating the short term CPI inflation assumptions
    • 3.1 Approach
    • 3.2 Forecasters' views of CPI inflation
    • 3.3 Inflation indexed bond yields
    • 3.4 Inflation indexed bond market
    • 3.5 Historical CPI inflation
    • 3.6 Summary
    • 3.7 Determination of CPI inflation assumptions at 31 December 2015
    • 3.8 Updating the short term CPI inflation assumption

The Treasury has published the associated Methodology which comprises four papers; the original methodology dated July 2010 and three subsequent papers dated May 2012, June 2013 and December 2015 (this paper). This paper documents an update of the nominal risk-free yield curve (no change in methodology) and a change in the way the short-term CPI assumption is determined under the Methodology. The short term CPI assumption is now based on giving a 50% weighting to the baseline forecast inflation assumption and 50% weighting to the breakeven inflation rate implied by the inflation-indexed bonds.  Short term CPI means up until the end of the nominal risk-free yield curve. In forecasting terms this currently covers both the short term 5 year and medium term 15 year forecasts.

This methodology is not intended to apply to the valuation of traded securities.