ECB Insight: De Guindos Comments Suggest Limited Impact of Omicron on Council Meeting
30 November 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos’ interview today with French daily Les Echos seems to indicate that the latest coronavirus variant does not fundamentally change anything as the Governing Council prepares to set the course of monetary policy.
Most tellingly, the Vice President conceded that the Omicron variant was ‘more bad news’, but appeared notably untroubled, compared for example to his fellow Spaniard, Banco de España Governor Pablo Hernández de Cos, who only yesterday fretted, ‘The resurgence of the pandemic in some euro area countries is somewhat undermining the economic outlook and recent virus variants are a reminder that we are still not out of the woods as regards the pandemic crisis’.
Omicron, the current German wave and lockdowns elsewhere were ‘always unfortunate’, de Guindos said, almost as if suppressing a yawn, ‘[b]ut the situation is different from that in 2020.’ He pointed to vaccination levels, more prevalent booster policies and the fact that adaptation meant that ‘the economic impact of a lockdown is no longer the same’.
The timing of Omicron had seemed downright fortuitous for the dovish faction on the Governing Council, as its members hunt frantically for arguments they might profitably marshal to limit the damage at the policy meeting in two weeks, but if de Guindos’ attitude prevails, they will have to find another point of attack.
Just as tellingly, de Guindos gave a wide berth to the dovish inflationary narratives relied on by de Cos and, last week, his Executive Board colleague Fabio Panetta. To be sure, de Guindos admitted that there was uncertainty, or at least that the outlook wasn’t ‘entirely clear’, and reiterated the mantra about the factors behind currently high inflation fading in 2022.
However, he explicitly drew attention to the recent underestimation of inflation by ‘[n]ot only the ECB, but all forecasters’, all of whom had been surprised by the strength of base effects, and suggested that another such surprise could be if next year, ‘bottlenecks may last longer than expected.’
‘As a result, there’s a risk that inflation will not go down as quickly and as much as we predicted’, he added.
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.’
Those are surprisingly hawkish tones from the number two at the ECB. On the other hand, that de Guindos, whose portfolio includes financial stability, is not wholly comfortable with prolonged massive accommodation was on display early in the interview when he noted the need to closely watch ‘increasingly widespread’ housing market overvaluation in part precisely because of the ‘backdrop of low interest rates’, and gently urged macroprudential authorities to consider taking steps to ‘ensure there is a soft landing if the cycle turns.’
Rather than directly deny that the ECB would signal policy tightening on December 16, de Guindos said the plan was to ‘adjust our pandemic emergency purchase programme (PEPP) to the dynamics of inflation, to our economic forecasts and to the changing health situation.’ Here he doubled down on the idea that Omicron was no inflection point, affirming that ‘[d]espite the recent rise in infections, COVID-19 will eventually fade away.’
The ECB would not taper in the manner of the US Federal Reserve, he said, confirming a reluctance that was always evident. And while he also corroborated the expectation that net PEPP purchases would end in March, he added that ‘they could be resumed if necessary.’
That makes us think it more likely yet that the PEPP could simply enter a state of dormancy from which it could be summoned at any moment at which its use was deemed proportionate to the situation, an arrangement that could potentially address conflicting views on flexibility and the propriety of including Greek assets in a purchase programme.
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.’
Asked about the potential for a rate hike by end-2022, de Guindos implied that this was an unlikely scenario, as his ‘personal opinion’ - on the basis of ECB forward guidance stipulating that net asset purchases had to end first – was that ‘net purchases will continue throughout next year. Beyond that, I don’t know.’
It is probably no surprise that de Guindos made clear he was a fan of the ECB’s targeted longer-term refinancing operations (TLTROs), given the ECB considered these recently to have so far been without side effects that would concern him more than anyone from a financial stability perspective.
Echoing others in calling the TLTROs ‘a very useful instrument’, de Guindos appeared to confirm two points Econostream made earlier this month, namely that the TLTROs would probably live to see another round but that there was no hurry to decide. ‘We can wait a little longer; it’s not going to be a decision we discuss in December’, he said.
He also took a clear stance on TLTRO-related cliff effects, an issue opinion has been divided on, as Econostream also reported. ‘Let’s not forget that TLTROs are not repaid on a fixed date but that there can be several repayment windows’, de Guindos said. ‘So there will not be a cliff effect, and the repayment will be spread over time.’
It is not excluded that de Guindos has reason to expect repayments to be distributed across time rather than occur all at the last possible date, but just last month, one insider Econostream spoke to said that ‘it is true that they can pay it back in advance, but if they do not, then of course there are cliff effects at the end.’