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Euro zone budget aid may need to be stepped up: ECB's Knot

FILE PHOTO: European Central Bank (ECB) board member Klaas Knot appears at a Dutch parliamentary hearing in The Hague, Netherlands September 23, 2019 REUTERS/Eva Plevier

FRANKFURT (Reuters) - Budget support for the ailing euro zone economy may need to be stepped up as the impact of central bank help amid the second wave of the coronavirus pandemic is limited, Dutch central bank chief Klaas Knot said on Tuesday.

Knot, normally a conservative voice on the ECB’s Governing Council and a critic of past monetary stimulus packages, said the ECB should keep borrowing costs low to help the economy weather the storm but governments should lead the response.

“The best that monetary policy can do in support of the economic outlook is to continue to neutralize the tightening effect that the pandemic would otherwise have on the highly accommodative financial conditions that were already in place pre-Corona,” Knot said.

“Fiscal policy must be in the lead,” said Knot, who also sits on the European Central Bank’s rate-setting Governing Council. “It may even have to be scaled up to buffer the effect of the renewed containment measures.”

With the euro zone likely heading back to recession in the fourth quarter, the ECB has already made clear it would provide more stimulus at its December meeting, only the details of it package need to be ironed out.

Speaking at a UBS conference, Knot added that households and firms appear to be adapting quickly to containment measures but the longer the pandemic lasts, the more vulnerable firms will become, raising the risk that liquidity issues morph into solvency problems, which in turn also impact the bank sector.

The ECB has already set aside 1.35 trillion euros for bond buys to keep government and corporate borrowing costs low but analysts expect it to raise this figure, perhaps by as much as 500 billion euros, as the pandemic with weigh on growth more than earlier feared.

“Monetary authorities have to stand ready to act and contribute to tackling any escalation of the Corona crisis. But beyond that, there are limits to what monetary policy can achieve,” he added.

Reporting by Balazs Koranyi; Editing by Francesco Canepa