Writing days before an update from the central bank, M&G bond fund manager Woolnough said the bank’s aggressive emergency measures were no longer needed amid low unemployment and positive growth.
He said: “It has completed and ceased its corporate bond buying programme, and recently committee members at the bank have been advocating the reversal of the ‘emergency’ rate cut of 2016.
“This is in stark contrast to this time last year when the bank had a bias towards easing. A reversal of policy appears to be on the cards.”
Woolnough argued the time has come for the bank to sell its corporate bonds to a market that has been “crowded out” by the bank’s purchasing programme.
With interest rates already at historic lows, the bank bought four times more corporate bonds in 2016/17 than the amount purchased in the aftermath of the 2008 financial crisis to help prop up the economy.
Around £10bn of corporate bonds were bought post-Brexit, compared with the £2.3bn bought following the collapse of Lehman Brothers in 2008.
The disproportionate purchase of corporate bonds is a notable feature of the bank’s policy over the last year, Woolnough added, and he believes it will start selling them back soon.
“The one major unwind of emergency policy of the great financial crisis of 2008 was the selling back of the non-gilts purchased to the market; I do not see why it should be different this time,” he said.
The bank itself has spoken of potentially tightening policy and argued lending conditions have become too lax.
Woolnough added: “One way to solve this is to let the private sector fund corporate debt, having been potentially crowded out of that option by the bank’s significant corporate bond buying programme.”
An update from the MPC on interest rates and quantitative easing is due on Thursday, 3 August.
