The arrival of Mark Carney as the new Governor of the Bank of England was greeted by such a vast fanfare that I’m sure no Fool was able to miss it — even if they tried!
Of course, such a welcome was only right, given that Mark Carney is apparently going to save the UK economy from oblivion. He is the man whom George Osborne, the government, media and pretty much everybody else has pinned their hopes upon to deliver something that has evaded his predecessor for all too long: economic growth.
Indeed, it seems to me that Carney has no option other than do something. He simply cannot let things tick along as they were under Sir Mervyn King. This man has the mandate to make changes and changes he will make.
For starters, the Chancellor has asked that he report back in August regarding the “quantum of additional stimulus and the form it should take”. Such uncertainty has led many commentators to suggest Carney will introduce forward guidance on interest rates; informing the market (as the Fed does) of the Bank’s intention to keep rates low until a fixed date or until specific data ranges have been met.
However, it is unlikely that a promise to keep rates low will be enough to deliver impressive economic growth. More likely is further QE and a continuation (albeit more openly) of Mervyn King’s nominal GDP (as opposed to inflation) targeting. The outcome of these two policies is very likely to be inflation above the 3% ceiling, although it would not be a major surprise for this ceiling to either be increased or thrown out.
In other words, it’s likely Mark Carney will accept higher levels of inflation in order to drive asset prices still higher in an attempt to improve business and market confidence. Such an improvement, it is hoped, will eventually lead to economic growth.
Of course, economic growth is all well and good but inflation is what concerns me (and I’m guessing you, too). This is where National Grid (LSE: NG) (NYSE: NGG.US) becomes very interesting, because it has made a commitment (from March next year and for the foreseeable future after that) to increase dividends per share in-line with increases in RPI.
Furthermore, shares currently trade on a price-to-earnings ratio of 13.8, which compares well to the utilities industry group (14.7) and to the FTSE 100 (13.3). Indeed, with shares currently yielding 5.3%, I feel less worried about inflation and more worried about whether Mark Carney — after such a big fanfare — is bound to disappoint in the end.
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> Peter does not own shares in National Grid.