How strikes are aiding MPCs in their monetary policy

The UK has had multiple strikes since the pandemic and they still continue till today and are set to continue going forward.

This week's data printed showed us how the UK has been faring for the past 3 months, and it does not look good. Nevertheless, since a risk of resurge for inflation persists, at BOE, policymakers are expected to continue hiking rates to ascertain that inflation meets their target.

Keys in the article:

Strikes and walkouts aiding MPC;
Risk to Inflation;
Is the brain and purse co-working?

Reign Capital | How strikes are aiding MPCs in their monetary policy

(Teachers in England will walk out on April 27th and May 2nd)

According to data released, the UK economy stagnated from the previous to the current month, and the gauge of 3 months’ average growth increased by 0.01% (when expectations were for it to stagnate or contract by 0.01%).

The gauge of business:

Business confidence has been decreasing for the past 5 months;
Industrial production has been decreasing since April 2022;
Manufacturing PMI has been decreasing since August 2022;
Service PMI has increased for the past 2 months;
Composite PMI has also increased for the past 2 months.

Other indicators are showing signs of strength while others of weakness. In the UK, producer prices are stabilising, and inflation expectations are decreasing, which may lead to lower consumer prices in the near future – which shall aid the government in dealing with FDA Union.

Strikes and walkouts aiding MPC

Strikes have been impacting the UK's GDP for quite some time now. Thousands of workers are still planning work stoppages, mostly due to unfavourable working conditions and the pressure that the cost-of-living crisis is putting on their wages.

From teachers to junior doctors, strikes have now spread to virtually every sector, and while some of the most impactful disputes are now suspended for talks, there is no shortage of other walkouts.

These activities then contribute to slowdowns in the economy at a time when BOE is hiking rates, and the cumulative effect of that is soon to be felt.

Huw Pill, the Bank of England’s Chief economist, is still on the hawkish side of MPC. With a low unemployment rate, growing household savings ratio and growing household disposable income, he is still pushing for another hike of 25 basis points. At the time of writing, the markets have almost fully priced it in, 85% chance of it coming to pass.

Risk to inflation

(BOE February 2022 Inflation Forecast)

In recent months several risks to a resurge in inflation have appeared, solely to name a few, we have OPEC+ temporary reduction in Oil production, Russia´s suspension of the Ukraine grain export deal, and a stronger US Dollar.

In the latest monetary policy report created by the BOE, they stated the following:

“The price of energy is not expected to rise so rapidly. The Government has introduced a scheme that caps energy bills for households and businesses, and oil and gas prices have fallen a lot recently.

We don’t expect the price of imported goods to rise so fast as some of the production difficulties that businesses have faced are starting to ease"

But, by OPEC+ temporarily reducing the production of its Oil supply, this creates less supply of it in the market, thereby increasing the price of Oil and therefore, the products derived from it – increasing the endeavour of BOE´s MPC to stabilise prices.

Russia´s suspension of Ukraine’s grain export deal bears great implications for the world´s grain market. Now that this UN brokered-deal is off, the food supply, which is exported from Ukraine, shall decrease, exacerbating both, the food crisis, and the cost-of-living crisis. The derived grain products supply shall shrink, and its price shall therefore increase (cost-pull inflation), leading then to potentially more interest hikes from BOE.

As FED´s Chair Jerome Powell is actively increasing the FED´s Fund rate, the US dollar just keeps getting more expensive. The more expensive the US dollar or the price of the US dollar is, the bigger the weight on other countries and their respective economies. This is due to the US dollar being the world´s reserve currency and the world´s most traded currency and most goods and services are priced in it. So, the more expensive the US Dollar is, the costlier world´s product shall be, thereby increasing the cost of production and the price to which consumers pay to purchase goods and services. This is one of the many reasons why BRICS nations are attempting to create a new reserve currency and actively pushing the De-dollarisation. Since the US is UK´s biggest trading partner, a stronger Dollar means more costs.

The examples provided, solely shows how risk to inflation still persists, and since monetary policy takes time to affect the economy, BOE MPC does not want to be caught by surprise and then play “catch up inflation”.

Is the brain and purse co-working?

More strikes are due to come this month of April and the following due to the FDA Union rejecting the government offer. This has been going on for some time now. The government provided a solution that they think it suffices but the Unions almost always reject it. In the latest one, the FDA accused the government of shooting itself in the foot and threatened to ballot members over potential strike action – they labelled the offer as “insulting”.

The government knows what the Unions want but does not provide it. Should this continue, without any extra turmoil or deviations of inflation to the north, inflation may well be close to BOE´s target. The key point here is managing inflation expatiations, because should FDA receives exactly what it is demanding, this shall potentially lead the BOE to increase lending rates more than expected due to fears of higher and stickier inflation. With more strikes set to come, UK GDP shall be negatively affected and therefore impact the increases in prices. So, let us wait and observe the cumulative effects of the fastest (or not) consecutive rate hikes in BOE´s MPC history.

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