Denmark’s Central Bank Warns Against Risks of Fiscal Easing

Denmark’s central bank warned against easing fiscal policy, arguing such a step would risk fueling imbalances that could lead to a new phase of economic overheating.

“From a cyclical perspective, there is no foundation for easing fiscal policy,” Governor Lars Rohde said in a statement. “There is a substantial risk that the timing will be wrong so that fiscal policy boosts an economy which is already on its way up. That will increase the risk of a new overheating of the economy.”

The bank cut its economic growth forecast for this year to 0.3 percent in 2013, from 0.5 percent previously, in a quarterly report published today. The economy will expand 1.6 percent next year, versus a June forecast for 1.7 percent, it said.

Denmark has lagged behind neighboring Norway and Sweden in surfacing from the fallout of Europe’s debt crisis. A 20 percent slump in house prices since their 2007 peak wiped out more than a dozen community banks as impairments ate through solvency buffers. A report today showed house prices grew 0.7 percent last quarter from the three months through March.

The statistics office said last month gross domestic product grew 0.5 percent in the second quarter from the first. While Denmark emerged from a technical recession, the recovery was driven by government spending and an increase in exports. Household spending, which fell in the first three months of the year, stalled in the quarter through June.

Denmark uses monetary policy to defend the krone’s peg to the euro. The central bank targets a krone rate of 7.46038 against the single currency. The bank in May cut its key lending rate to 0.2 percent from 0.3 percent and kept its deposit rate at minus 0.1 percent.

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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