World's central banks enforce pay squeeze even as they tighten monetary policy

Regulators face struggle to balance demands for upping employees' salaries

The US Federal Reserve is usually reticent in revealing pay details of its employees. Reuters

Central bankers trying to ensure that surging consumer prices do not feed yet more inflation are doing what they can to keep their own houses in order.

For staff working for US Federal Reserve chairman Jerome Powell, his eurozone counterpart Christine Lagarde and their global peers, annual pay adjustments cannot avoid the impact of a once-in-a-generation cost-of-living shock.

Even if they do not like it, central bank employees face the same hit as everyone else in the labour market at a time when their bosses want to contain rampant inflation in the economies they oversee by heading off excessive wage increases.

Some are grumbling. While there is little evidence that strikes are imminent, walkouts at Brazil’s central bank last year and by some Bank of England staff in 2017 underscore how such organisations can struggle to contain discontent, not least at a time of global labour-union unrest.

Even so, governors face an acute political imperative to ensure wage discipline, particularly in instances when negotiations are not generalised across the public sector.

The bitter alternative if their employees get fully compensated for lost purchasing power is to invite criticism for hypocrisy — and to risk yet more inflation as others follow suit.

“Central banks must be first in line to prevent a wage-price spiral,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich and a former International Monetary Fund official.

“They are institutions committed to price stability and everyone needs to realise that. They can send an important signal.”

In the eurozone, where inflation reached a peak of 10.6 per cent last year — a record in the history of the single currency — European Central Bank staff received a 4 per cent salary increase for this year. That followed a 1.48 per cent raise that had also failed to keep pace with price growth.

It is a similar case at major national central banks in the euro area. At the Bank of France, a 4 per cent raise awarded in July was the first increase in five years.

Germany’s Bundesbank — a temple of price stability — lifted pay for staff by 1.4 per cent in April 2021 and then by 1.8 per cent a year later. Public-sector salary talks that encompass the organisation are continuing, with union officials bidding for a 10.5 per cent raise that is likely to transpire far lower, if past accords are any guide.

News that the BoE is also containing wage demands emerged only this week. A 3.5 per cent raise and a one-off 1 per cent salary top-up accepted by union officials for the next fiscal year is half inflation and less than the 5 per cent agreed by the government for 5.5 million public-sector workers. The lowest-paid employees will receive the biggest gains.

“We need to strike a balance between maintaining budgetary discipline with public funds, retaining critical skills and addressing the cost-of-living pressures facing our staff,” a BoE statement said.

While the Fed in Washington is reticent in revealing compensation details, its 2023 pay scale published this month indicates a maximum increase of 5.1 per cent in the lower and upper ranges of every salary grade aside from the most junior level. That compares with average US inflation of 8 per cent last year.

Even in Japan, whose central bank wants stronger wage gains to take hold, governor Haruhiko Kuroda is practising restraint. He argues it is difficult to raise salaries at the Bank of Japan before private companies lift theirs. Pay rose a mere 0.2 per cent for staff in the fiscal year that ends in March. Pressure for a bigger raise is likely to mount after inflation there reached 4 per cent in December.

Away from the Group of Seven industrialised countries, a squeeze on public-sector salaries is affecting other central banks, too. In Brazil, staff went on a three-month strike last year that ended unsuccessfully when a deadline passed for new wage increases to take effect.

Protests outside the Central Bank of Brazil in Brasilia, by its workers. The strike proved unsuccessful. Bloomberg

While UK public-sector unions are agitating for more pay, the BoE itself appears to have headed off the threat of similar action for now. It is well aware of the dangers, having faced the first strike in 50 years in 2017 by staff working in areas from maintenance to security.

Dissatisfaction at the ECB might yet intensify. A staff representative, Carlos Bowles, last month said “we’re not happy” with the raise on offer. Subsequently, a large survey of employees showed 69 per cent said confidence in the central bank’s leadership had suffered either “a lot” or “somewhat".

On past form, though, any action may be restrained: the ECB’s first strike in 2009 was a 90-minute affair. It featured a protest with workers blowing whistles, banging drums and waving placards criticising then-president Jean-Claude Trichet.

While holding firm on pay, central banks can negotiate on other matters. Part of the agreement for BoE staff is a one-off benefits increase worth 1 per cent of salary available in cash if desired. Officials also lifted the leave entitlement to 26 days plus public holidays, and offered dental insurance.

At the top of the pay scale, governors may be far better paid than subordinates but they do face constraints of their own.

At the Fed, Mr Powell’s salary will rise by 4.1 per cent to $235,600 this year. Remuneration for ECB president Ms Lagarde will rise by a similar amount to about €445,000 ($486,000) because she gets the same percentage advance as her staff.

BoE governor Andrew Bailey — whose call last year for UK workers to hold off on big pay demands prompted a furious union backlash — said in November he would not accept a raise even if offered.

Japan is different still. Mr Kuroda’s own compensation in the current fiscal year rose at twice the pace of staff to 35.2 million yen ($271,000). Even so, the increase amounted to only 0.4 per cent.