ECB official sets high bar for Omicron-driven stimulus
December 08 2021 10:05 PM
The European Central Bank headquarters in Frankfurt. The ECB is gearing up for a crucial meeting on
The European Central Bank headquarters in Frankfurt. The ECB is gearing up for a crucial meeting on December 16, when policy makers plan to determine the future of their stimulus tools.

Bloomberg / Frankfurt

The Omicron variant of Covid-19 must inflict significant damage on the euro-area economy for European Central Bank Governing Council member Martins Kazaks to back additional stimulus.
It’s too early to tell how the new strain will affect the continent’s recovery, according to Kazaks, who heads Latvia’s central bank. As things stand, the ECB’s €1.85tn ($2.1tn) emergency bond-buying programme – known as PEPP – should end as scheduled in March, he said.
“At the current moment, we don’t know how the omicron variant will develop,” Kazaks said in an interview. “Unless it spills over into significant and large negative revisions to the outlook for growth, I don’t see that March – which the market has been expecting for some time and which we’ve been communicating in the past – should be changed.”
The ECB is gearing up for a crucial meeting on December 16, when policy makers plan to determine the future of their stimulus tools.
Alongside the heightened Covid-19 risks, inflation – currently running at the fastest pace since the common currency was founded – will form the heart of the debate.
Italian bonds fell slightly after Kazaks’s comments and benchmark 10-year yields climbed for a second day, rising one basis point to 0.93%, while corresponding German yields were steady at minus 0.37%.
With scientists still weighing up the dangers posed by omicron, Kazaks says the ECB has time to alter its policy path early next year, should the health assessment warrant it.
“If in February we see that it’s painful then of course we can change our views and that’s the issue of flexibility,” he said. “In my view, it’s possible both to restart PEPP or increase the envelope if it turns out to be necessary.”
The path for consumer prices, which surged 4.9% in November – more than double the ECB’s 2% goal, is the other uncertainty.  
While US Federal Reserve Chair Jerome Powell last week suggested abandoning the word “transitory” with regard to the current bout of elevated inflation, ECB President Christine Lagarde still attributes the spike in Europe to energy costs, supply snarls and other factors that will gradually fade. ECB Vice-President Luis de Guindos warned on Wednesday that price growth may stay higher for longer, but sees it easing in 2022 and converging toward the target.
Despite the uncertainty caused by omicron, he said he doesn’t expect the variant to “derail” the euro-area recovery. Kazaks says inflation “remains hump-shaped” and should slow next year.  
“To exactly what level will it land in 2023-24, of course, there’s lots of uncertainty,” he said. With little evidence that soaring prices are triggering wage increases that would risk entrenching faster inflation, “my baseline remains that it slides to below 2%.”
Kazaks, however, concurs with ECB Executive Board member Isabel Schnabel in deeming price risks as skewed to the upside.
Echoing remarks last week by Lagarde, he cautioned against longer-term commitments on monetary stimulus while the outlook for inflation and economic growth is so unclear.
“At the moment we simply know too little about omicron,” Kazaks said. “I see it important to remain data-driven and make our decisions step by step. So react to the data, rather than preempt decisions when uncertainty is way too high.”
Meanwhile the European Central Bank may need more time to determine its next policy steps as the Omicron strain of Covid-19 and new pandemic restrictions weigh on the euro area’s economic recovery, according to Governing Council member Olli Rehn.
Speaking in Helsinki just over a week before a crucial ECB meeting on the future of its stimulus programmes, the Finnish central bank chief stressed the importance of clarifying policy makers’ options.
“If that’s not possible when taking decisions now, it may be possible within some weeks,” Rehn said yesterday. “Sometimes it’s best to win time in making decisions.”
With scientists still assessing the threat posed by omicron, the ECB will discuss plans for its €1.85tn ($2.1tn) pandemic bond-buying programme, known as PEPP, as well as other tools on December 16. Inflation – currently running at the fastest pace since the euro was founded – will also be at the heart of the debate.
Rehn said officials will probably be able to decide next week on whether to halt net purchases under PEPP as scheduled at the end of March. But he was less keen on cementing a path for the ECB’s older asset-purchase programme and – as some of his colleagues have – stressed the need to maintain some room to manoeuvre amid the current uncertainty.
“My stance is to continue the normal purchase programme and alongside keep PEPP in the toolbox at least,” Rehn said. “If it looks like the situation is getting worse again, PEPP is flexible and can be used effectively to grease the monetary policy transmission mechanism.

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