European Central Bank is monitoring the markets after French turbulence

European Central Bank is monitoring the markets after French turbulence

The president of the European Central Bank, Christine Lagarde, said that officials are “attentive” to the evolution of financial markets, shortly after his colleague Philip Lane said he is not worried about the French turbulence.

Policymakers answer questions following week of turmoil which wiped $258 billion off the country's stock market capitalization and caused French bond yields to widen compared to their German equivalents.

“Price stability goes parallel to financial stability,” Lagarde told reporters Monday while visiting a quantum computing research site in Massy, ​​southwest of Paris. “We are attentive to the proper functioning of the financial markets and I think that today in any case we will continue to be attentive, but we will limit ourselves to that.”

French markets began the week showing some signs of stabilization after far-right leader Marine Le Pen pledged to work with President Emmanuel Macron if he prevails in the upcoming national election. The Head of State called the vote after his party's defeat in a regional vote for the European Parliament.

Earlier on Monday, Lane – the ECB's chief economist – sounded optimistic about last week's turmoil, when asked about the matter at a Reuters event in London.

“What we are seeing in the markets is, of course, a revision of prices”, he claimed. “It's not, you know, the world of messy market dynamics.”

Vice President Luis de Guindos, speaking at a conference in Spain, similarly noted that price movements have been “orderly, without extreme impact.”

Speaking in a personal capacity, the former Spanish finance minister added that recent political events do concern him. “I am concerned about illiberal movements that call into question the European integration process,” said Guindos. “In this world of renationalization, returning to the internal question, the only way is to be more united.”

The overall tone of policymakers' comments is consistent with last week's Bloomberg report. that ECB officials see no cause for alarm in the recent market turbulence.

In more general comments, Lane explained the rationale for the central bank's emergency crisis tool known as the Transmission Protection Instrument, or TPI.

“It is very important that the ECB makes it clear that we will not tolerate unjustified and disorderly market dynamics that pose a serious threat to the transmission of monetary policy”, said. “We cannot give a case where essentially market panic, market illiquidity and market sentiment disrupt our monetary policy.”

Regarding inflation and interest rates, Lane reiterated the ECB's confidence in bringing price growth consumer back to the 2% target in the second half of 2025 and that officials They are not precommitting to follow any particular path.

In early June, the ECB reduced its borrowing costs for the first time since of an unprecedented avalanche of rate hikes to quell record inflation, but he gave no clear guidance on where the policy will go next.

Lane said every meeting is “live,” but suggested another rate cut as early as July is highly unlikely and that the next big discussion could take place after the summer break at the September meeting.

Highlighting the “momentum” of services inflation, he said the ECB needs “more than a month of data” to assess the trend. In May, price growth in that sector surprisingly increased to 4.1%.

Money markets are betting that a continuation of this month's quarter-point cut will occur in October, while the possibility of a third reduction by the end of the year has increased to 75% from 25% a week ago.

Lane also said the new Federal Reserve dot chart showing officials expect Just a rate cut this year doesn't change your thinking on the divergent policies between the two central banks.

“There are a variety of opinions on that dot plot, rather than being a big move in distribution,” he said.