/www.bloomberg.com/ By Farah Nayeri
London, Jan. 6 (Bloomberg) -- Three of the world's top five central banks get new leaders this year, and a fourth, the U.S. Federal Reserve, faces a change as early as 2004. The result may be less concern about inflation and more support for economic growth, investors and analysts said.
The European Central Bank, the Bank of Japan and the Bank of England will all have new managers by August. From July, Jean- Claude Trichet will run the ECB, provided he's cleared in a false- accounting trial starting today. Masaru Hayami leaves the Bank of Japan in March, and Mervyn King takes over the Bank of England in July.
The U.S., Europe and Japan will grow less than 3 percent this year, according to the Paris-based Organization for Economic Cooperation and Development. With 1970s inflation rates of 10 percent or more a distant memory, the new central bankers will probably keep a lid on interest rates.
They're ``likely to be slower to raise rates than people expect, and pleased to see growth re-establish itself,'' said John Llewellyn, chief global economist at Lehman Brothers Holdings Inc. and a former chief economist at the OECD. ``If modest inflation comes back into the system, that would almost be welcome.''
The Fed's overnight rate is currently at a four-decade low of 1.25 percent; the U.K. and European benchmarks are at 4 percent and 2.75 percent respectively. In Japan, rates are at zero.
Good for Companies
As the U.S. prepares for a possible attack on Iraq and oil prices trade at two-year highs, companies from Wal-Mart Stores Inc., the world's largest retailer, to Munich Re, the biggest reinsurer, depend on low borrowing costs to sell, invest or hire.
``The cost of living has been lower for everybody,'' said Nick Fisher, joint chief executive of International Greetings Plc, a U.K. supplier of stationery to retailers including Tesco Plc. ``If rates keep moving the same way for the next couple of years, I'll be delighted.''
One reason U.S. economic growth outpaced other regions through the 1990s, and will do so again this year, is that Federal Reserve Chairman Alan Greenspan recognized that accelerating labor productivity would allow the economy to grow faster without stoking inflation. He persuaded members of the Fed's monetary policy committee not to raise rates in Sept. 1996, for example, when several were concerned about rising inflation.
The Fed may or may not change the guard next year. Greenspan's chairmanship is up in June 2004, and he might keep his seat as a governor until January 2006. To date, the White House has not said it is seeking a successor to the 76-year-old chairman.
After Duisenberg
In July, Wim Duisenberg, the Dutchman who has run the ECB since mid-1998, is set to leave. France, which persuaded the European Union to let one of its nationals share Duisenberg's eight-year presidency, has proposed Trichet to replace him.
Trichet is on trial through Feb. 12. He's charged with knowing that the formerly state-owned lender Credit Lyonnais SA understated its losses while he headed the Treasury, the department that collects, manages and spends government revenue, in the early 1990s. Trichet has denied the charges. While trial delays might postpone the handover, Duisenberg has said he will stay until a new boss is ready to step in.
In the euro's first four years, the Frankfurt-based ECB, whose main aim is to keep inflation at or below 2 percent, has been accused by some politicians and executives of focusing too much on curbing inflation and not enough on boosting growth. From May 1999 to May 2001, the ECB raised rates. The Fed started cutting in January 2001, the Bank of England in February.
Why Zero Is Bad
ECB watchers say the bank may use a strategy review during Duisenberg's last six months in office to clarify its definition of inflation, making clear it dislikes zero inflation as much as it does soaring prices.
``Presently, zero inflation, just a whisker away from deflation, would be within the ECB's definition of price stability,'' said Holger Schmieding, an economist at Bank of America in London. ``They're probably going to come out and say, `we're not going to zero percent.'''
The bank will probably also stop identifying M3 money supply -- cash in circulation and short-term deposits -- as one of two so- called pillars of its policy, economists said. ``Under current conditions, M3 is not so important,'' said Bank of Greece Governor Nikos Garganas, one of the ECB'S 18 policy makers, in an interview.
Policy itself is unlikely to shift much.
``From time to time, personalities change, yet that doesn't bring about a change of doctrine,'' said Christian Noyer, the ECB's vice president until May, in an interview. ``Central banks' mandates are extraordinarily hard to modify.''
Trichet, governor of the Bank of France since 1993, would ensure that continuity. An architect of the euro, he has inflation- fighting credentials: Price increases in France averaged 1.6 percent in the last decade, down from 10 percent in the decade ended in 1985.
Tough in Japan
The Bank of Japan's next governor, after Hayami retires March 19, faces a battle to keep growth and inflation up. The economy may lapse into the fourth recession in a decade; prices are falling at a yearly rate of almost 1 percent; and the yen rose almost 10 percent against the dollar in 2002, making Japanese exports more expensive.
``It's desirable for the next Bank of Japan chief to be someone aggressive in fighting deflation,'' Prime Minister Junichiro Koizumi said late last month.
The government may opt for a policy of inflation targeting, economists say, pumping money into the economy until prices rise by the desired amount. Nobuyuki Nakahara, a former Bank of Japan board member who advocates such policies, may be the man for the task, investors and analysts say.
`More Expansive'
``Governor Hayami has followed a deflationary policy,'' said Allan Meltzer, a professor of political economy at Carnegie Mellon University and an honorary adviser to the BOJ since 1986. ``I expect the next governor to follow a more expansive policy that will depreciate the yen.''
The Bank of England's King, who goes from deputy governor to governor in July, is familiar with inflation targeting. Formerly the bank's chief economist, he was the first to introduce a target for the U.K. in 1992. That helped pave the way for the government to make it independent, letting it wrestle down inflation. The goal is now 2.5 percent.
King will also pay closer attention to house prices, currently growing about 30 percent a year and fueling a consumer binge that has been the chief engine of U.K. economic growth. King has described the rise as unsustainable.
``He will be much more focused on using an intellectually rigorous framework to analyze and assess the risks to inflation, on the upside, and on the downside,'' said Danny Gabay, U.K. economist at J.P. Morgan Chase & Co. He co-wrote the bank's quarterly Inflation Report with King from 1996 to 1998.
The Greenspan Years
In Greenspan's 15 years leading the Fed, he has overseen a decade of economic expansion, the longest in U.S. history, and an average inflation rate of 2.4 percent. It was almost four times that level 20 years ago. He also oversaw the largest series of rate reductions of any central banker, lowering the benchmark overnight rate 12 times between January 2001 and November 2003.
Foremost among potential successors is Martin Feldstein, a Harvard University economist, who analysts say has the right mix of academic clout and Republican affinities. Feldstein, 63, heads the National Bureau of Economic Research, a non-profit research clearing house that has been home to 12 of the U.S.'s 31 Nobel Prize-winning economists.
Feldstein chaired the Council of Economic Advisers under President Ronald Reagan from 1982 to 1984 and tried to stem the economy's slide into its worst postwar recession. Last year, he backed President George W. Bush's $1.35 trillion, 10-year tax cut initiative.
Expansion Dangers
Feldstein has recently warned against ``hyperexpansive'' interest-rate policies fueling a stock-price boom. He declined requests for an interview.
``It is very clear that he worries an overly expansionary monetary policy can create asset-price bubbles,'' said Nancy Roman, managing director at G7 Group Inc., a consultancy whose clients have more than $100 billion in assets under management.
Investors say the next Fed governor should guard against dropping prices as much as rising ones.
``It took a damn long time for the Fed to figure out they had won'' the fight against inflation, said Paul McCulley, a managing director at Pacific Investment Management Co., who oversees about $100 billion in assets. ``The post-Greenspan regime has to be even- handed with respect to the cyclical risk of rising inflation and falling inflation.''
Others who may be in line are Donald Kohn, 60, who was named Fed governor this year, and fellow governor Ben Bernanke, 49, a former Princeton University economist who advocates flexible inflation targeting.