Richard Woolnough’s warning for Super Thursday


The Bank of England’s unwinding of its corporate bond buying programme will be more significant than an interest rate rise, M&G bond fund manager Richard Woolnough has warned ahead of Super Thursday this week.

The central bank votes on interest rates this week and also releases its quarterly inflation report, which will include an updated forecast on growth following a first estimate reading from ONS showing GDP growing at 0.3 per cent.

Comparing the central bank’s response to the global financial crisis and the Brexit referendum, Woolnough notes that measures have been proportionately more weighted towards corporate bond buying in response to the latter.

The Bank cut rates 4.5 per cent in response to the global financial crisis compared to 0.25 per cent in response to the Brexit vote.

But its corporate bond buying programme was more than four times higher in response to Brexit with £10bn of purchases compared to £2.3bn post-Lehman.

“From a rate perspective, removing the quarter point cut is not that dramatic as the conventional policy response was limited last year,” Woolnough writes for M&G’s Bond Vigilantes blog.

“From a corporate bond perspective however, selling the corporates back to the market could potentially weigh on the performance of sterling corporate bonds held by the Bank.”

Woolnough notes bond spreads have returned to new post-financial crisis tights.

This comes as the Bank eyes tightening policy, the need for emergency funding appears low, and Governor Mark Carney warns lending conditions have become too lax, Woolnough says. The private sector has potentially been crowded out of the market and should be let back in, he suggests.

Case for rate hike dwindling

The case for an interest rate hike anytime soon is dwindling, says EY Item Club chief economic adviser Howard Archer, who predicts the MPC will vote 6-2 to hold rates at 0.25 per cent.

“The case for any near-term interest rate hike has been watered down by inflation dipping in June, while UK growth remains stuck in a low gear,” Archer says.

Inflation fell back to 2.6 per cent in June from 2.9 per cent in the previous month.

The Bank of England growth forecasts in the May report were 1.9 per cent in 2017, 1.7 per cent in 2018 and 1.8 per cent in 2019.

However, Archer says these are likely to be downgraded on lower than expected Q2 GDP growth.

A rate rise would serve to contain the growing £199bn consumer credit bubble, says Hargreaves Lansdown investment analyst Laith Khalaf.

“However it would also heap more pressure on UK households by raising mortgage repayment costs, at a time when wage growth is weak. It would also increase the costs of unsecured borrowing, which would be difficult for many consumers.”

Moody’s this week lowered its outlook on UK asset-backed securities due to rising household indebtedness.