By Mike Dolan

LONDON (Reuters) -The slightly alarming sight of a French leader calling on the European Central Bank to nuance its focus on inflation may be less dramatic than it first seems – but it speaks loudly to market zeitgeist and increasingly anxious bond investors.

In a keynote speech on the European Union at the Sorbonne University in Paris on Thursday, French President Emmanuel Macron said the ECB should no longer focus solely on keeping inflation under control and urged an expanded economic remit for the central bank – even suggesting a de-carbonization target.

“We can no longer have a monetary policy whose sole objective is inflation,” Macron said, in comments harking back to the ECB’s strategic review in 2021 and intense Franco-German rows over both the ECB’s mandate and euro budget pact prior to the euro launch 25 years ago.

They may well get short shrift again in Germany and other like-minded euro states – and within related parts of the ECB.

But with ECB policymakers set to discuss green monetary policy and another upcoming strategy review at a retreat in Ireland next month, it certainly sets a tone.

Most obviously, the words may feed a brewing assumption in world markets that policymakers will be too distracted by concerns about growth, geopolitical rivalry, mounting public debts and even climate change to squeeze inflation sustainably back to 2% targets over the years ahead.

As U.S growth stays firm and inflation sticky through early 2024, the Fed is already hesitating in lowering interest rates this year. But the ECB looks determined to start cutting in June – interpreting far more sluggish euro zone growth as sufficient to zap the vestiges of above-target inflation there.

The broader economic context around just inflation is already well acknowledged by both major institutions.

But partly because of that, long-term market inflation expectations have not yet returned to 2% despite frequent protests by both central banks that they’re bound to get them there and will deliver.

JPMorgan research head Joyce Chang and her team said one of their top 10 takeaways from meetings held around last week’s International Monetary Fund gathering in Washington was that “global core inflation should settle closer to 3% than 2%.”

Although risk premiums in long-term bond markets remain relatively subdued, the growing conundrum for bond investors is how to price either that higher inflation plateau over time – and hence lower real returns – or the possibility of even more determined central banks keeping policy rates higher for longer.

The upshot is that nominal U.S. Treasury and European sovereign bond yields are returning to what were considered a danger zone for world markets last autumn – and threatening a scary Halloween re-dux.

SECONDARY MANDATE

In that context, Macron headlines on broadening the ECB remit are unlikely to soothe any nerves – not least in a year where many investors also fret about potential threats to Federal Reserve independence after November’s U.S. election.

Although just one of 20 leaders in the multi-national euro zone, Macron may have some support in countries struggling close to recession over the past nine months and facing rising interest costs on bloated public debt piles.

In fact, Bank of France Governor Francois Villeroy de Galhau underlined the point on Monday and said the upcoming period of ECB rate cuts “creates favourable conditions for budget consolidation.”

While the Fed has an explicit dual mandate of maximum employment and price stability, it’s long been presumed the ECB’s founding charter kept it solely focused on inflation – though less rigidly than some think, as Macron and others seem to insist.

As often in European politics, this issue one has been around the houses in different forms before.

Macron’s take re-opens a long-standing debate on what the ECB’s founding fathers set in stone about its future role – one much discussed as the central bank set about its last strategic review three years ago.

Specifics of that 2021 rethink included a shift to a “symmetric” 2% inflation target from a prior formulation of “close to or below” and climate change was also added as a formal consideration in formulating long-term policy.

But the whole process shone a light into what ECB watchers call the central bank’s “secondary mandate” – as enshrined in Article 127 of the Treaty on the Functioning of the European Union.

Article 127 makes clear the ECB’s “primary objective” is price stability, although it leaves defining that up to the ECB itself.

But it adds that: “Without prejudice to the objective of price stability, the (ECB) shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union.”

As euro debt crisis rescues over the past 15 years and strategic policy changes attest, this leaves considerable wiggle room both for ECB policymakers themselves and their political masters in changing priorities, targets and leanings ahead.

While these may never be used to undermine the primary objective, it’s not hard to see why bond markets are not entirely convinced the latter is in stone and Macron’s statement just underlines that.

The opinions expressed here are those of the author, a columnist for Reuters

(Editing by Paul Simao)

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