No strong links between pay hike and inflation: BB

Bangladesh Bank got mixed results while analysing the impact of pay scales on inflation, according to the new monetary policy statement released yesterday.

“Our analysis did not indicate any clear or near one-to-one relationship (between pay scale and inflation),” the BB said in its policy stance for January-June of 2015.

The central bank has analysed the causative factors of inflation around different pay hikes since 1982 after the proposed eighth pay scales triggered controversy centring its possible effects on inflation.

Some economists and policymakers argue that it will create inflationary pressures on consumers while another section says it will not.

The BB analysis found that inflation rates after the third (in 1985) and fourth (in 1991) pay scales showed downward trends though it was rising before the announcement.

The fifth (in 1997), sixth (in 2005), and seventh (in 2009) pay scales, on the other hand, were followed by rising inflation rates.

“Despite the rising trends in inflation rates after three pay scales, it would be unwise to conclude that the eighth pay scale would also follow suit,” the BB said.

The central bank found that higher inflation rates were caused by a variety of factors during the different pay scale periods. The major factors reported were higher prices of oil and food items in international markets, distortions in supply side factors, natural calamities and disasters, political instability, and disruption in domestic and global food production.

Other factors included the effect of private credit expansion, high government borrowing, sharp depreciation of the taka, disruption in industrial production, food supply shortage, and pay hikes.

It is difficult to clearly attribute the factors that led to higher inflation, except for a few well-documented factors such as oil price hike, high food prices in the international market, supply shortage, and political instability.

“A strong relationship between the announcement of the pay scales and inflation cannot be established,” the BB said.

Last month, the Pay and Services Commission proposed a new salary structure — a hike of up to 100 percent — for government employees.

Inflation extended its declining trend in December, coming down to 6.11 percent — the lowest in 25 months — mainly due to falling commodity prices in the global markets. The overall inflation rate, which has been on the decline in the last several months, was 6.21 percent in November. In October 2012, inflation was 5.86 percent.