Central bankers across the globe need to plan for monetary tightening to avoid feeding asset bubbles, Danish central bank Governor Lars Rohde said.
“Beyond the short horizon, central banks have to be vigilant of the effects, including the effect of negative real interest rates, and they have to plan for an exit as normalization progresses,” Rohde said in an e-mailed reply to questions. Asked whether such policies could fuel asset bubbles, Rohde said, “Yes.”
The warning from the head of Denmark’s central bank, which has kept its deposit rate below zero since July, comes as policy makers from Japan to Europe to the U.S. deploy unprecedented monetary stimulus to jolt their economies into recovery mode. In Japan, the government has nominated a candidate to head the central bank who has openly backed more easing, while Federal Reserve Chairman Ben Bernanke this week defended his bank’s record asset purchases designed to keep rates low for longer maturities.
Central banks have hesitated to withdraw support measures as they wait for clear signs a global recovery is around the corner. In the euro area, Italian elections this week led to an inconclusive result, with the risk of political stalemate jeopardizing the nation’s commitment to austerity.
The 17-nation euro area will contract 0.3 percent this year after shrinking 0.6 percent in 2012, the European Commission estimates. Both the U.S. and Japan will expand less than 2 percent this year, the commission said Feb. 22.
“Looking globally, there is no short-term alternative to the expansionary monetary policy, given the state of the real economy,” Rohde said.
The Fed has held its benchmark rate close to zero since 2008, while Japan’s main rate is between zero and 0.1 percent. The Frankfurt-based European Central Bank cut its policy rate to 0.75 percent in July in an effort to ease the region’s debt crisis.
“It’ll be the same pattern as every time cycles shift,” Jacob Graven, chief economist at Sydbank A/S, said by phone. “Central banks pull funds they injected while things were bad, but it’s safe to say the risk of getting things wrong this time will be considerably bigger.”
Euro-zone inflation was 2.2 percent in December, while annual prices grew 1.6 percent in the U.S. last month, official figures show. Inflation in Denmark was 2 percent in December and 1.3 percent the following month, as the economy shrank 1 percent last quarter from a year earlier, a report showed today.
The Danish central bank is obliged to track the ECB to defend the krone’s peg to the euro. The bank, which resorted to a negative deposit rate last year to counter a capital influx into haven markets such as AAA rated Denmark’s, raised rates last month by 0.1 percentage point after low-yielding assets lost their allure. The bank’s deposit rate is minus 0.1 percent and its benchmark lending rate is 0.3 percent.
In Denmark, “monetary policy is solely dedicated to maintaining the fixed exchange rate,” Rohde said.
The krone rose to its strongest against the euro since October, before trading at 7.4564 as of 3:47 p.m. in Copenhagen.
“One can assume that the central bank has an underlying interest in normalizing monetary policy” away from negative interest rates, Jan Stoerup Nielsen, senior analyst at Nordea Bank AB in Copenhagen, said by phone.
As central banks in the world’s biggest economies stay in crisis mode, the ripple effects are already being felt in some of the world’s richest countries, where policy makers are struggling to contain overheating.
Sweden, Norway and Switzerland are tightening rules on mortgage lending as low rates inflate property prices and credit growth. Private debt burdens have grown across Scandinavia.
Swedish households amassed debt equivalent to 173 percent of disposable incomes last year, while their Norwegian counterparts will exceed 200 percent this year, their central banks estimate. Denmark carries the world record at 322 percent of disposable incomes, according to Standard & Poor’s.
Swedish Riksbank Governor Stefan Ingves, who is also the head of the Basel Committee on Banking Supervision, has warned low rates are adding to the risk of driving up household debt.
In minutes of the bank’s Feb. 12 meeting, Ingves said, “With the current low interest rates, one must be aware of the link between household debt and monetary policy.”