ECB's Knot: more caution needed on unconventional tools

FRANKFURT (Reuters) - The European Central Bank should exercise more caution in deploying unconventional tools with poorly understood effects or if their use fuels complacency among other decision-makers, Dutch Central Bank chief Klaas Knot said on Thursday.

Having exhausted most of its conventional instruments, the ECB has relied for years on untested measures like negative interest rates and buying up bonds to fuel growth and inflation, even though their eventual effects were not fully understood.

With Christine Lagarde taking over as the bank's president this month, she has promised a broader review of policy, which could lead to a more precise definition of its inflation target or how it uses certain tools.

"Policymakers should consider applying more caution in deploying unconventional instruments that are subject to more uncertainty, while acting more forcefully with conventional instruments," said Knot, who openly opposed resuming bond purchases this autumn.

The ECB has long argued that its measures would be more effective if fiscal policy played a greater role. Governments have done little to boost competitiveness, however, instead pocketing the savings generated by much lower borrowing costs.

"A cautious monetary policy response is also appropriate, if there is a risk of complacency in other policy areas," Knot said. "For example, when monetary policy measures lead to delayed efforts to shore up bank balance sheets or implement structural reforms at the national level."

Knot also noted that the ECB has done its job in easing borrowing costs and financial conditions were not an impediment to economic activity or an increase in inflation.

(Reporting by Balazs Koranyi, ediitng by Larry King)

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