ECB should use bond buys more sparingly in future, Knot says

Knot Advocates Cautious Approach to Future ECB Bond Purchases

FRANKFURT (Reuters) - The European Central Bank should use bond purchases more sparingly in the future given costly side effects, Dutch central bank chief Klaas Knot said on Friday just as the ECB is starting a strategy review.

The ECB bought trillions of euros worth of debt over the past decade in the hope of rekindling inflation when it was too low, and there is still more than 4 trillion euros of bonds left on its books, impacting market prices years after the need for stimulus has ended.

While ultra low inflation is now a distant prospect, policymakers may outline as part of the review how they would respond to such a scenario given the mixed success of past bond purchases.

Knot, the longest-serving policymaker on the ECB's rate-setting Governing Council, argued that bond buys, commonly known as quantitative easing, should be short but powerful to make an immediate impact on market pricing and sentiment.

"My personal preference in such cases would be to employ QE forcefully when needed to avoid deflationary risks, but to avoid using it overly persistently, as I believe the balance of benefits and costs to shift over time," Knot said in a speech in Amsterdam.

His comments echo views expressed by ECB board member Isabel Schnabel, who earlier argued that the bar for starting QE should be higher than in the past since bond holdings can be unwound only gradually and will thus distort asset prices for a long time.

Knot also said that bond purchases are more effective when inflation is far below the target, and the case for its application fades as inflation gets close to target.

"QE has not been very effective in fine-tuning inflation. At the same time, asset purchases come with potential side effects, such as inflated asset prices, misallocation of resources, and risks to the central bank balance sheet."

(Reporting by Balazs Koranyi; editing by Mark Heinrich)