2024.06.17 17:46
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After the French market plummeted, senior officials from the European Central Bank spoke out: "Closely monitoring" with no "extreme impact"

On Monday, European Central Bank President Lagarde stated that the ECB will closely monitor the French market, but only limited to this; ECB Vice President Guindos said that the market repricing is orderly and has not had extreme effects; ECB Chief Economist Lane said that there is currently no need to provide any assistance to French bonds, as the recent market turbulence caused by political uncertainty is "not disorderly"

Last week, French Finance Minister Le Maire warned that a victory by the far right could trigger a financial crisis, leading to a brutal sell-off of French stocks and bonds. Some analysts speculated that the European Central Bank (ECB) might intervene, but the ECB remained calm. On Monday, three ECB officials maintained an optimistic tone in their speeches, consistent with the previous week.

On Monday, ECB President Lagarde, visiting a quantum computing research base in southwest Marseille, told reporters:

"The ECB is closely monitoring the smooth operation of financial markets and is continuing to watch the markets after the turmoil in France, but only to a limited extent."

Meanwhile, ECB Vice President de Guindos, speaking at a conference in Santander, Spain, emphasized in a personal capacity:

"Market repricing is orderly, with no extreme impact. I am concerned about the rise of far-right forces across the region. In this world of re-nationalization and returning to domestic issues, unity is the only way forward."

On the same day, ECB Chief Economist Lane, interviewed at the London Stock Exchange, stated:

"The ECB currently does not need to rescue France by buying French bonds, as the recent market turmoil due to political uncertainty is not 'disorderly.' The latest market trends do not meet one of the key conditions for ECB intervention, which is that the rise in risk premiums is disorderly and unreasonable. What we see in the market is repricing, but it is not chaotic at the moment."

Although Lane and Lagarde did not directly address the situation in France, Lane emphasized that all eurozone governments need to comply with the EU's fiscal framework and engage with the European Commission.

Furthermore, Lane provided a more comprehensive explanation of the ECB's "Transmission Protection Instrument" (TPI):

"The ECB must make it clear that we will not tolerate unreasonable and disorderly market dynamics, as such dynamics pose a serious threat to the transmission of monetary policy. We cannot let market panic, market illiquidity, and market sentiment disrupt our monetary policy."

TPI, short for Transmission Protection Instrument, aims to address financial fragmentation risks. It allows unlimited purchases of a country's bonds under market pressure, with no preset purchase limit, provided that the country complies with EU fiscal rules.

Earlier on Monday, media reports indicated that five ECB officials stated that there are currently no plans to discuss launching emergency bond-buying programs to support French bonds. These officials generally believe that it is the responsibility of the French political class to convince investors that they will implement sound economic policies. Two even suggested that the ECB should not intervene until a new government is formed and fiscal plans are announced.

Regarding inflation and interest rate issues, Lane stated on Monday:

"After the COVID-19 pandemic and the Russia-Ukraine conflict, inflation rates have experienced four years of exceptionally strong growth. I remain confident that inflation rates will fall back to the ECB's 2% target by 2025, and officials will not commit to any specific path in advance." On June 6th, the European Central Bank (ECB) cut interest rates for the first time in 5 years, but did not provide clear guidance on the next policy direction. Lane hinted that in May, the service sector inflation unexpectedly rose to 4.1%, and the ECB needs over a month of data to assess this trend. The possibility of another rate cut in July is slim, and the next major discussion may take place at the September meeting after the summer break.

Some market participants have begun to doubt whether the price trends in the 20 countries of the eurozone are in line with the ECB's expectations, especially after strong wage and inflation data in recent weeks. In response, Lane stated that individual data points may have errors, but acknowledged that the ECB needs to ease domestically driven service sector inflation this year.

As Lane made his remarks, data from the European Union's statistics office showed a significant 5.1% increase in unit labor costs in the first quarter, higher than the 3.4% in the last three months of 2023. Lane stated that although recent wage growth has been strong, it is not a cause for concern as it implies that wage growth in the coming years will slow down. Despite the eurozone economy growing, interest rates are still far from reaching a level that no longer suppresses economic activity