European Central Bank

French relief sets up ECB for change of tack in June: Sources

Mario Draghi
Alex Kraus | Bloomberg via Getty Images

European Central Bank policymakers are breathing a sigh of relief after the first round of France's presidential vote put a pro-euro centrist in pole position, but they are not likely to change their policy stance until June.

Three sources on and close to the bank's Governing Council told Reuters that with the threat of a run-off between two eurosceptic candidates in France averted, and with the economy on its best run in years, many ratesetters see scope for sending a small signal in June towards reducing monetary stimulus.

There is, however, little appetite to change at this Thursday's meeting the pledge to buy bonds at least until the end of the year and to keep rates at rock bottom until well after that.

A move in June, however, might mean changing the wording of the ECB's opening statement to reflect improved prospects for the economy.

Some or all the references to prevailing downside risks to the outlook, to the possibility of further rate cuts or to larger asset purchases may be taken out, the sources said.

"The discussion will be on removing some of the easing biases," one of the sources said. "I can't say how quickly it will happen because that depends on the data."

The ECB declined to comment.

Emmanuel Macron, a pro-European centrist, is widely expected to beat eurosceptic candidate Marine Le Pen to become France's next president on May 7 after winning the first round of voting on Sunday.

More importantly for the ECB, his victory has allayed the threat of a run-off between Le Pen and anti-euro far-left, eurosceptic candidate Jean-Luc Melenchon, allowing the ECB to focus more on the improving economic outlook and less on political risks outside of its control.

But the general mood on the ECB's Governing Council, which includes its six Executive Board members and the governors of the bloc's 19 central banks, remains one of caution after years of crisis and stubbornly low inflation.

The ECB is on course to buy 2.3 trillion euros ($2.50 trillion) worth of bonds and is charging banks for parking excess cash with it overnight in a bid to stimulate lending and, with it inflation and growth, in the euro zone.

French central bank governor Francois Villeroy De Galhau said last week it was too early yet to make any policy change and chief economist Peter Praet warned earlier this month that even the notion of a rate hike could undo some of the ECB's stimulus.

For this reason, any move will depend on whether data shows the recent rebound in inflation, which the ECB aims to keep just below 2 percent, is taking hold.


Price growth in the euro zone was 1.5 percent last month and is not expected to rise back to 2 percent for years to come.

"We need to use a lot of caution before making any change," another source said.

Time is on their side. The ECB's bond-buying programme is effectively on auto-pilot until December.

This means that any announcement about the pace and duration of the scheme in 2018 can wait until September or, if needed, October.

However, the side effects and technical constraints of the ECB's purchases are becoming more visible by the day.

The central banks of Portugal and Ireland are running out of government bonds to buy while the Bundesbank's massive purchases of German debt is exacerbating scarcity of that paper, an essential form of collateral for financial firms.

The ECB has already made clear that changing the terms of the programme to alleviate such issues carries political and legal risk.

This adds weight to the calls for a gradual winding down next year if the recovery in euro zone inflation persists.

"We're constrained in what we can do about the programme," one of the sources said.