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'QE last resort against EU deflation'

Friday, March 21 17:22:47

The European Central Bank should consider asset buying only as a last resort to fend off deflation, ECB Governing Council member Klaas Knot told Germany's Handelsblatt.

The ban on financing governments made it difficult to use quantitative easing - private and public asset purchases - in the euro zone, Knot told online newspaper Handelsblatt Live in an interview published today.

"I would only not rule it out categorically in case of a large negative shock, like a deflationary downward spiral. But even in that situation, we would have a nicely filled tool box to deploy other measures first," Knot was quoted as saying.

Before going down the route of purchasing assets from banks, which would then have more money they could lend out, the ECB could cut interest rates further or launch a programme to revive the market for securitised loans, Knot said.

So far, though, there were no signs of deflation taking hold in the euro zone even if inflation rates were low, he said.

Turning to the ECB's new task of banking supervision, which is part of a broader move towards closer integration of the financial sector in Europe aimed at restoring investors' trust and averting any future crisis, Knot said these operations should be spun off into an independent institution eventually.

Knot, who is also governor of the Dutch central bank, said it made sense to use the ECB's credibility to build up a European banking watchdog and that the crisis left little alternative to such a model. But over the longer term this should change, he said.

"Once it is established, at some point in the future we could again think about moving supervision out of the ECB and launching an independent institution," Knot said.