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Danish Central Bank Governor Says Central Banks Must Plan Exit as Bubbles are Growing

“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.

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