ECB’s de Guindos Not Overly Worried About Omicron, Predicts Net Asset Buys Through 2022
30 November 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos on Tuesday said that euro area inflation would definitely ease starting next year.
In an interview with French daily Les Echos, de Guindos did not appear overly concerned about the Omicron variant of the coronavirus, calling it, the current German wave and the lockdowns elsewhere ‘always unfortunate’, but part of a situation ‘different from that in 2020’ thanks to vaccines and economic adaptation.
It is ‘certain’ that the factors currently driving inflation are temporary and should fade in 2022, he said. However, ‘bottlenecks may last longer than expected’, he said. ‘As a result, there’s a risk that inflation will not go down as quickly and as much as we predicted.’
That inflation expectations are ‘a little below’ the ECB’s 2% target is ‘largely reassuring’, he said. The ECB must watch closely for second-round effects via wages that could lead to more persistent high inflation. Though there have been none yet, the pandemic has deferred most wage negotiations to the end of this year and early next year, he said. ‘So we should be very careful.’
At its policy meeting next month, the ECB will adjust the pandemic emergency purchase programme (PEPP) ‘to the dynamics of inflation, to our economic forecasts and to the changing health situation’, he said.
‘Despite the recent rise in infections, COVID-19 will eventually fade away’, he continued. ‘But we will not go ahead with tapering … as the US Federal Reserve has done. The President of the ECB has announced that net purchases will end in March. But they could be resumed if necessary.’
Monetary policy post-PEPP must remain accommodative, albeit not as much so as in the thick of the crisis, ‘because some of the scars left by the pandemic haven’t properly healed yet’, he said. The ECB must then ‘be even more driven by economic data.’
De Guindos said he was personally confident that net asset purchases ‘will continue throughout next year. Beyond that, I don’t know.’
As others, de Guindos praised the ECB’s targeted longer-term refinancing operations (TLTROs), but put off a discussion of their future. ‘[T]here is no urgency to decide on their renewal’, he said. ‘We can wait a little longer; it’s not going to be a decision we discuss in December.’
A continuation of the TLTROs, he appeared to suggest, would address post-pandemic ‘scars that need to be taken into consideration.’ As repayment is not ties to one particular date, ‘there will not be a cliff effect’, he added.
An asset market bubble can only be identified in hindsight, but the housing market is characterised by ‘pockets of overvaluation that go beyond the fundamentals’, a widening trend, he said. The ECB must watch this closely and macroprudential authorities should consider boosting countercyclical capital buffers that had been relaxed to counter the pandemic, he said.
Though Europe’s banks ‘have performed fairly well recently’, this ‘is therefore based on an optimistic scenario in which the recovery continues and there is no large wave of insolvencies’, he said. ‘However, it is good to be very cautious, because once the government support measures are withdrawn, insolvencies and non-performing loans will increase.’