Pay hikes for govt staff may fuel inflation: governor

The interim government’s proposed new pay scale for public servants could intensify inflationary pressures and strain the banking system, Bangladesh Bank (BB) Governor Ahsan H Mansur said yesterday.

“The salary hike will require borrowing more from the banking system. Is that going to help reduce inflation? No,” the governor said at an event on the implications of the LDC graduation for the banking system, organised by the International Chamber of Commerce-Bangladesh (ICCB) in Dhaka.

The government is planning a general salary increase, which will double the wage bill.

Speaking about the central bank’s efforts to tame inflation, Mansur said bringing down inflation is achievable, but will take time.

Bangladesh, he noted, has already reduced inflation from around 12.5 percent to about 8.3 percent. “Inflation has to come down. But we must give it time. We must be patient.”

However, he cautioned that the real challenge lies in breaking inflation expectations, which have been long-established.

“Historically, Bangladesh has never had low inflation,” he said, noting that inflation has typically hovered around 6 percent to 8 percent.

Claims of sustained high growth alongside low inflation, he added, were often more artificial than real.

“This is why interest rates cannot be low,” he said, adding that rates can only fall sustainably if non-performing loans are reduced sharply through accountability, good governance, and effective supervision.

“If we can reduce bad loans and lower expectations, why can’t we bring inflation down?” he asked.

He said inflation expectations are visible across the labour market, where workers routinely expect annual wage increases. In many factories, wages rise by 10 percent, 15 percent, or even 20 percent each year - not necessarily because productivity has increased, but because higher inflation is assumed.

“These expectations are deeply ingrained. We have to break that cycle,” he said. “Unless expectations change, inflation will not come down to 3 or 4 percent. And that will take time.”