National Grid launches new inflation-linked bond
The 10-year bond will pay an interest rate of 1.25% adjusted to reflect changes in the retail prices index (RPI). Traditionally, these types of bonds are only available to major institutional investors, but National Grid has chosen to capitalise on savers disgruntled by low interest rates.
"There is evidence of strong demand from retail investors for inflation-linked products to protect them from certain effects of inflation, and we hope that this product will address some of that demand," says Malcolm Cooper, global tax and treasury director at National Grid.
Retail bonds are considered higher risk than bank accounts because they are not covered by any depositor guarantee systems to protect deposits if the firm was to go bust. However, National Grid is considered a low-risk business due to its position at the centre of the utility industry with consistent demand for its services.
Investors should be aware that the minimum investment is £2,000 and if inflation falls over the 10-year period you may not receive any interest although the company will pay back no less than the face value of the bonds – so your capital is only at risk if National Grid goes bust. Interest will be paid twice a year and at the end of the 10 years the capital you receive back will also be adjusted to reflect inflation.
The bonds will be on offer until 29 September and can be purchased through stockbrokers.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).