French government bonds have been among the hardest hit in a global bond selloff, as investors worry that political manoeuvring ahead of next year's presidential election could undermine efforts to rein in the country's high budget deficit.
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Speaking at a CNN event in Bangkok, Lagarde said France faced specific market pressures but emphasised that the primary solution lay with the country's own fiscal policies, Reuters reported.
Investors and analysts have been speculating in recent weeks about whether the ECB could deploy its Transmission Protection Instrument (TPI) to support French bonds. The crisis-fighting mechanism allows the central bank to purchase government debt when it determines that market pressures are unwarranted and disorderly and threaten the effective transmission of monetary policy across the euro zone.
Lagarde's remarks indicated that France should first take steps to restore investor confidence through fiscal consolidation rather than rely on potential ECB support.
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ECB Watches for Signs of Broader Inflation Pressures
Turning to monetary policy, Lagarde said elevated euro zone inflation had been driven predominantly, though not entirely, by a surge in energy prices linked to the Iran war.The ECB has yet to see clear evidence of second-round effects, in which higher energy costs feed into other prices and wages. However, the central bank is closely monitoring early indicators, including trade union demands during wage negotiations, to assess whether inflationary pressures could become more persistent.
Lagarde said policymakers needed to anticipate the emergence of such effects rather than wait until they became fully visible, Reuters reported.
The ECB has raised interest rates twice over the past four months, with markets expecting another increase in December as policymakers assess the inflation outlook and the economic consequences of higher energy prices.
IMF Forecast Points to Modest Eurozone Growth
Lagarde also assessed the euro zone's economic outlook, describing the International Monetary Fund's forecast of 1.1% gross domestic product growth for the region this year as modest but not an unfavourable outcome.She highlighted continued support from German government spending on infrastructure and military investment, which could help underpin economic activity amid persistent uncertainty over energy costs and the broader global outlook.
The remarks came on the sidelines of the annual meetings of the IMF and the World Bank in Bangkok, where policymakers are assessing the impact of geopolitical tensions, inflation and rising borrowing costs on the global economy.
For France, the immediate challenge remains convincing investors that its public finances are on a sustainable path. With political uncertainty adding to market concerns, the government's ability to deliver credible deficit-reduction measures could prove crucial in stabilising bond prices and containing borrowing costs.
(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)
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