ECB puts on brave face as new virus variant spreads

BY Reuters | ECONOMIC | 11/29/21 04:31 AM EST

* Lagarde, de Guindos and Villeroy seek to calm investors

* De Cos guides for no rate hike for over a year

* ECB under pressure from high inflation (Adds de Cos, Schnabel; changes dateline to Frankfurt)

FRANKFURT, Nov 29 (Reuters) - European Central Bank policymakers sought to reassure investors rattled by a new variant of the coronavirus on Monday, arguing that the euro zone's economy had learned to cope with successive waves of the pandemic.

Carrying a "very high" global risk of surges according to the World Health Organization, the Omicron variant is threatening a brisk economic revival and could jeopardise plans by the ECB and other global central banks to dial back emergency support after nearly two years.

But ECB President Christine Lagarde, her deputy Luis de Guindos and French governor Francois Villeroy de Galhau put on a brave face.

"There is an obvious concern about the economic recovery in 2022, but I believe we have learnt a lot," Lagarde told Italian broadcaster RAI late on Sunday.

"We now know our enemy and what measures to take. We are all better equipped to respond to a risk of a fifth wave or the Omicron variant."

She was echoed by her fellow countryman and ECB policymaker Francois Villeroy de Galhau who said "successive waves have proven so far to be less and less damaging, and this one shouldn't presumably change the economic outlook too much".

ECB vice-president Luis de Guindos acknowledged the "high degree of uncertainty" and called for keeping all policy options open but he argued much higher vaccination rates should help Europe better deal with these risks.

But Spain's central bank governor Pablo Hernandez de Cos said the ECB should "err on the side of caution" when setting policy and ventured a prediction for no hike in interest rates until "some time" after next year.

Markets regained composure on Monday as investors awaited further details of the variant, which has made some countries reimpose travel curbs.

UNDER PRESSURE

The ECB is under pressure to reduce its monetary stimulus, starting from its 1.85 trillion euros ($2.09 trillion) Pandemic Emergency Purchase Programme (PEPP), as euro zone inflation makes multi-decade highs above 4%.

De Guindos said on Friday that PEPP would end in March as planned and the debate among policymakers has mostly been on what comes next, possibly including increased purchases under the ECB's regular Asset Purchase Programme.

De Cos said the ECB should retain some of PEPP's "flexibility", which has allowed the central bank to buy when and where it was most needed - including sizeable amounts of Italian and Spanish debt in the spring of 2020.

In a sign of caution, consumer sentiment in the euro zone started turning south even before news of the variant broke last week, data showed on Monday, and mobility also declined.

But the ECB has pledged to run PEPP only until the damage wrought to inflation by the pandemic is repaired.

This has arguably happened, with inflation in the euro zone seen hitting 4.4% this month and staying above the ECB's 2% target next year.

ECB board member Isabel Schnabel said earlier inflation likely peaked in November and there was "no indication" it would settle above the ECB's goal. ($1 = 0.8861 euros) (Reporting by Leigh Thomas in Paris, Jesus Aguado and Emma Pinedo in Madrid, Gianluca Semeraro in Milan, Thomas Escritt in Berlin; Writing by Francesco Canepa in Frankfurt Editing by Gareth Jones and Chizu Nomiyama)

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