(Adds background on ECB’s monetary policy stance) AMSTERDAM, Jan 27 (Reuters) - The European Central Bank (ECB) could decide to cut its deposit rate further below zero if that proved necessary to keep its inflation target in sight, Klaas Knot, a member of the ECB’s governing council, said on Wednesday. Knot’s comment constituted the most explicit hint to date from an ECB policymaker about the possibility of a rate cut to stem a rally in the euro - a move that seemed highly unlikely until recently. “There is still room to cut rates,” Knot, who is governor of the Dutch central bank, said in an interview with Bloomberg TV. “But of course that would have to be seen in conjunction with our overall monetary stance, which is determined by a multiplicity of tools.” The ECB has formally kept a rate cut on the table for months by saying it was prepared to use all its instruments. But chief economist Philip Lane has often argued that other tools such as bond purchases were better suited for dealing with the market shock caused by the coronavirus pandemic. ECB President Christine Lagarde said last week the ECB was “prepared to adjust all (its) instruments... Nothing is off the table”. The ECB last cut its deposit rate in September 2019, to -0.50%. INFLATION Knot said the ECB would closely monitor the recent strengthening of the euro to determine its effects on the outlook for inflation. “If it were to become too dominant, in terms of threatening to derail our inflation objective, then of course we would have the tools available to counter that,” he said. “That would of course have to be a holistic assessment of all the tools in our toolbox, but the DFR (deposit facility rate) would be one tool.” The ECB targets an inflation rate below but close to 2%. Annual inflation for the euro area stood at -0.3% last month. Knot said he was “cautiously optimistic” about Europe’s economy recovering during 2021, as the rollout of COVID-19 vaccines should give more room for growth in the second half of the year. Interest rates in the euro zone will remain low in the foreseeable future, he added, as relatively low production will limit inflation. “It has to be seen how that will play out, before we can start talking about normalising interest rates,” he said. (Reporting by Bart Meijer in Amsterdam and Francesco Canepa in Frankfurt; editing by John Stonestreet and Gareth Jones)