High frequency data show that travel to retail and recreation destinations, restaurant bookings and flights have all declined in the past few weeks as coronavirus restrictions have been tightened in the face of rising hospitalisations. It now looks likely that GDP growth will be lower than our forecast of 0.7% q/q in Q4. The Omicron variant has added to these downside risks although at this stage its transmissibility, severity and capacity to escape vaccines are unknown. Meanwhile, we think euro-zone inflation has probably peaked at nearly 5% in November. If restrictions are tightened sharply, energy inflation may fall more than we have assumed, pulling headline inflation down a bit further and faster than we are assuming. But core inflation – which matters more to central bankers – could end up higher than anticipated if supply problems last for longer. Either way, it now seems likely that the ECB will maintain some capacity to keep bond purchases high and flexible beyond next March.
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