The head of the Danish central bank is warning the country’s pensions sector that monetary policy may be less able to play a big role in supporting a weakening economy this time around, while predicting growth rates in Europe and globally will taper over the next few years.

Lars Rohde, governor of Danmarks Nationalbank told an audience at the IPE Conference and Awards 2019 in Copenhagen: “I do not subscribe to the view that central banks have run out of ammunition.

“But considering the starting point, monetary policy may be hard pressed to play as prominent a role in support of the economy as during previous downturns,” he said.

In that light, Rohde said it was even more important that fiscal buffers were built in good times.

“Higher public debt sustained by central banks is not a long-term solution,” he said.

Setting the scene in a speech focusing on challenges for the pensions industry in a low interest rate environment, Rohde outlined his views on the economic outlook and implications for monetary policy.

“Growth rates in Europe and further abroad are set to taper in the coming years. The economic momentum has slowed during 2019,” he said.

While the likelihood of a recession in Europe may be limited, he said a slowdown seemed unavoidable, citing factors such as weaker trade growth, investment, a contraction in manufacturing and the uncertainty of Brexit and US-China trade tensions.

“Now the next slowdown may hit the European economy before monetary policy has had a chance to normalise – although our definition of ‘normal’ has also been called into question,” said Rohde, a former chief executive officer of ATP, Denmark’s largest pension fund.

To further complicate matters, he said structural factors, and not purely monetary policy, were keeping market rates low.

Several global structural factors were driving the decline of real interest rates, he said, such as lower structural economic growth and the global savings glut.

One implication of a lower “natural real interest” or “r*” – the real interest rate when the economy is growing in line with its potential – was that the effectiveness of monetary policy to respond to an economic contraction may be hampered, Rohde said.

“Real rates will have to be lower than r* to stimulate the economy,” he said.

The continued easing of monetary policy and lower structural interest rates would intensify the challenges currently facing institutional investors and the pension system in particular, Rohde added.

“These challenges are further compounded by the gloomy outlook for growth, as well as demographic developments,” he said.