(Bloomberg) -- The European Central Bank must have crisis tools on hand such as its TPI bond-buying program even if they aren’t needed now to help France, according to a senior International Monetary Fund official.

“In a monetary union you need to have the instruments available in order to deal with stress,” Alfred Kammer, director of the institution’s European department, said in an interview on Tuesday at the ECB’s annual retreat in Sintra, Portugal. “You want to make sure that your policy gets traction everywhere.” 

The ECB created its TPI tool in 2022 during a moment of market jitters involving Italy, seeking to ensure that it could raise interest rates without stoking turmoil. Last week, German Finance Minister Christian Lindner said it could be illegal to use it if France’s legislative election triggers a dangerous selloff in the country’s bonds. 

  • Sign up for the Paris Edition newsletter for special coverage throughout the French election.

Earlier on Tuesday, Societe Generale SA Chairman Lorenzo Bini Smaghi, a former ECB official, described those remarks as “quite shocking.” Kammer suggested that the central bank must be able use its arsenal without impediment. 

“When you’re looking at the architecture of the euro area, it’s important that these tools are available, that they can be deployed if needed,” he said. “TPI is one of these tools and the ECB has many other instruments, such as PEPP and OMT.”

What Bloomberg Economics Says...

“We can think of (at least) three reasons why the ECB’s Christine Lagarde won’t have Le Pen’s back.”

—Jamie Rush, David Powell and Eleonora Mavroeidi. For their ECB INSIGHT, click here

The IMF official shared the assessment of ECB colleagues that bond markets aren’t worrying. The announcement of France’s snap election last month prompted investors to demand the highest premium on the country’s debt since 2012.

“We have seen a repricing of risks, but no disorderly or unwarranted movements in markets,” he said. “Markets reacted very well to new news. So far there are no problems in the sovereign bond markets.”

On inflation in the euro region, Kammer observed that it’s “certainly” going in the right direction. 

“The disinflationary process was even faster than expected and we always knew the road would be bumpy,” he said. “There is no need to overreact if monthly data disappoint somewhat.”

He sees additional room for monetary-policy easing. 

“We suggest a further gradual reduction of interest rates to reach a terminal rate of around 2.5% at the end of the third quarter of 2025 — if data develops as expected,” Kammer said.

But he also warned that central banks should avoid “premature loosening.”

“It’s going to be extremely costly if inflation flares up again and they have to go through a second round of monetary policy tightening,” Kammer said. “We are not seeing that risk at this stage in the euro area.”

©2024 Bloomberg L.P.