Speaking following the Bank of England’s selling of its final corporate bond holdings, which it bought in 2009, Woolnough praised the Bank’s strategy of buying an out of favour asset class from the private sector.
The move, he said, both stabilised the UK corporate bond market by providing a backstop bid and was highly profitable for the Bank.
Woolnough said: “It helped to reduce the cost of funding at the margin for issuers, and would have added to the effects of QE.
“However, empirically measuring these effects is hard to do, corporate bond markets that experienced no domestic support from their central banks appear to have performed similarly, and the debate on the true effectiveness of QE remains.”
He said that the most important lesson learnt from the move was that state intervention can work where markets are priced inefficiently.
State intervention can work
“It is probably a good base to have the state intervene where markets are inefficient, for example in areas such as healthcare, defence, law and order, and infrastructure. The danger comes when the state interferes to the detriment of an efficient market. From an economic point of view, aggressive trade barriers are the first thing that comes to mind where there would be a great deal of consensus from the left and right side of politics.”
Woolnough also called into question whether the euro’s benefits outweigh its downsides, or vice versa, asking whether it aids a free market via price transparency and low transaction costs, or whether it hinders efficiency by having a single interest and exchange rate for a range of diverse economies.
He concluded that while the purchase of corporate bonds was a profitable move both for the Bank and the state, selling its larger portfolio of gilts could drive the market against it.
