ECB downplays need for France intervention

London — The European Central Bank’s (ECB) chief economist played down on Monday the need for it to come to France’s rescue by buying bonds, saying recent market turmoil fuelled by political uncertainty was not “disorderly”.

In a Reuters NEXT Newsmaker interview, Philip Lane said he remained confident inflation will fall back to the bank’s 2% target in 2025 after four years of unusually brisk price growth after the Covid-19 pandemic and Russia’s invasion of Ukraine.

French financial markets endured a brutal sell-off late last week as investors cut their positions ahead of a snap election that might give a majority to the far right. That has led some analysts to speculate that the ECB might intervene.

But Lane said the latest market moves did not fulfil one of the key conditions for ECB intervention — that a rise in risk premiums is disorderly and unwarranted.

“What we are seeing in the markets is a repricing, but it is not in the world of disorderly markets right now,” Lane said in the interview at the London Stock Exchange.

He did not directly address the situation in France, but said all eurozone governments needed to comply with the European Union’s fiscal framework and engage in dialogue with the European Commission.

Sources at the ECB told Reuters at the weekend they had no plan to discuss emergency purchases of French bonds, and that it was for politicians in Paris to reassure investors.

Marine Le Pen’s Eurosceptic National Rally (RN), which leads in opinion polls, is calling for a cut in the state pension age, energy price reductions, increased public spending and a protectionist “France first” economic policy.

French finance minister Bruno Le Maire has warned the Eurozone’s second biggest economy would be at risk of a financial crisis if the far right wins the election, to be held on June 30 and July 7.

The ECB’s Transmission Protection Instrument (TPI) allows it to buy unlimited amounts of bonds from a eurozone country that finds itself under market pressure, but only if it is complying with parameters including the EU’s fiscal rules.

Fairly confident

At its June 6 meeting, the ECB raised its forecasts for inflation this year and next even as it cut interest rates, leaving some investors uncertain of the central bank’s intentions.

Lane said there was “a fair amount of confidence” at the ECB about inflation falling back to 2% late next year.

“There’s a lot — a fair amount of confidence about the destination in the second half of next year,” Lane said.

Some market participants have started to doubt that prices in the 20 countries that share the euro will behave as the ECB expects, particularly after strong wages and inflation data in recent weeks.

Lane said individual data points could be “noisy” but conceded that the ECB needed inflation across the services sector to ease this year.

“I think this is an example where we need to see the momentum come down in the second half of the year,” he said.

As Lane was speaking, Eurostat data showed unit labour costs rose by a hefty 5.2% in the first quarter of the year, accelerating from 3.4% in the last quarter of 2023.

Lane said the latest wage increases, while strong, were not in themselves a cause for concern because they implied a lower pay rise in subsequent years.

Investors are expecting the ECB to cut the rate it pays on bank deposits once or, more likely, twice between September and December, followed by one or two further reductions next year.

Lane did not comment on how many more cuts were on the cards but said the ECB won't have all the information it needs at its July 18 meeting. He said that while the eurozone economy is growing, rates were still far from a level that no longer put the brakes on activity.

In fact, he argued that the full effect of rate increases had yet to be felt.

“We don’t think the peak effect on inflation dynamics has happened,” Lane said. “The ongoing impact of our monetary policy decisions will keep lowering inflation into next year.”