ECB's Lane sees no need for any French bond rescue

By Balazs Koranyi and Francesco Canepa

LONDON (Reuters) -The European Central Bank's chief economist said on Monday there was no need for the ECB to come to France's rescue by buying bonds because 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 ECB's 2% target in 2025 after four years of unusually brisk price growth following the COVID 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 hand power 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.

ECB President Christine Lagarde added later that the ECB would monitor markets because price and financial stability are closely linked.

"Price stability goes hand in hand with financial stability," Lagarde told reporters in Paris. "We pay close attention to the smooth functioning of financial markets, and today we continue to do so."

Neither Lane nor Lagarde directly addressed the situation in France. But Lane said all euro zone governments needed to comply with the European Union's fiscal framework and engage in dialogue with the European Commission.

ECB sources 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.

The election, to be held on June 30 and July 7, has intensified worries about fiscal sustainability in the euro zone's second-largest economy, weeks after France's high deficit led to a credit rating cut.

French Finance Minister Bruno Le Maire has warned that a far-right victory could risk a financial crisis.

Marine Le Pen's National Rally (RN), which leads in opinion polls, has called for a lower retirement age, energy price cuts, more public spending and "France first" economic policies.

A new leftist alliance meanwhile said on Friday it wanted to reduce the retirement age and tie salaries to inflation. Polls show the leftist parties coming second behind the RN.

"All the possible scenarios are worrying for the French public finances," said Eric Dor, a professor at the IESEG school of management.

The ECB's Transmission Protection Instrument (TPI) allows it to buy unlimited amounts of bonds from a euro zone 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 policy meeting, the ECB raised its forecasts for inflation this year and next even as it cut interest rates, leaving some investors scratching their head about the central bank's intentions.

Lane said the ECB still saw inflation falling back to 2% in late 2025, adding: "There's a lot, a fair amount of confidence about the destination in the second half of next year."

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 wage and inflation data in recent weeks.

Lane said individual data points could be "noisy" but conceded that the ECB needed inflation across the domestically-driven 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 5.1% in the first quarter, accelerating from 3.4% in the last three months of 2023.

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

Investors are currently 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 euro zone 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 impact 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."

(Additional reporting by Leigh Thomas, David Milliken, Marc Jones and Dhara Ranasinghe; Editing by Catherine Evans)