NEW YORK (Reuters) - Prospects for the euro zone economy have improved but the time to withdraw support has not yet come, three European Central Bank rate setters said on Wednesday, days before a tense French presidential election and the ECB’s own policy meeting.
Investors are on tenterhooks before a closely-fought first round of Sunday’s presidential elections in France, where two of the four leading candidates are threatening to leave the European Union and the euro currency.
Any turmoil in the bond market after the French vote would push up borrowing costs for countries and companies - undoing some of the stimulus the ECB is providing - and even raise questions about the euro’s survival.
Comments by French central bank governor Francois Villeroy de Galhau, ECB chief economist Peter Praet and Executive Board member Benoit Coeure suggested the bank is increasingly optimistic but wary of taking away its stimulus, due to run at least until of the year, too soon.
“Our current monetary policy stance remains fully appropriate ... and should not be adjusted before we see more concrete signs that inflation can be sustained at levels closer to our target,” Villeroy said in New York.
He added citizens’ confidence needed to be gained by achieving the ECB’s mandate of keeping euro zone inflation, a gauge of economic health that has lagged for most of the past four years, close to its target of almost 2 percent.
Markets see no change at the April 27 meeting and even in June only a tweak in the ECB’s guidance is expected despite euro zone inflation now comfortably above 1 percent.
Also in the United States for the International Monetary Fund’s spring meeting, Praet and Coeure stood by the ECB’s stated policy path, which foresees bond purchases worth 60 billion euros a month until the end of the year and ultra-low rates well past then.
But they disagreed on the outlook for the economy, with Coeure arguing the risk of a new downturn was no longer prevalent.
“I think it’s fair to say that the balance of economic risk in Europe is by and large balanced, by and large flat,” Coeure said in New York. “I personally don’t see risks as tilted to the downside anymore.”
Speaking at a separate event, Praet was more cautious about the longer-term prospects.
“In the very short term, Q1 and Q2, there are some upside risks,” he said. “But looking beyond, I see downside risk prevailing.”
Despite the nuanced disagreement, Coeure stood by the ECB’s stated policy path.
ECB President Mario Draghi and Praet have been deflecting calls, particularly from Germany, to tighten the money taps, arguing the inflation surge is due to rising energy costs while underlying price growth is stuck at less than half of the ECB’s target.
The ECB is not expected to announce plans to phase our its stimulus measures next year before September.
Writing by Balazs Koranyi; Editing by Toby Chopra