At least, they believe that they are able to do it. In the first volume, Demiurgos speak about the matter with Mare and express his desire to create a laboratory where he could conduct experiments, like his "ranch" in the Aberion hills, since their children could increase the fighting power of Nazarick. For the moment it does not look like none of the NPCs are going to try to reproduce, because the consencus between them was that they need the authorization of Ainz.
They can but why would they? There aren't any NPC who is in love with someone (except Albedo). Also a heteromorph can make offspring only with another heteromorph. Breeding between het. and demihumans or humans are not possible. And I belive all undeads are infertile even if they have the "necessary organs".
Increasing the power of Nazarick? Doesn't needed. The residents of the new world are all weaklings.
It goes without saying that humanoids (humans, elves, dwarves, ect.) can't reproduce with demihumans (lizardmen, beastmen, ogres, etc.), but that might not be the case for humanoids and heteromorphs. After all, BDL has "human" descendents and Dark Knight of the 13 Heros is believed to be a half-demon. So I believe [living] hetero's CAN beget offspring with humanoids because of their polymorphic-anatomy.
Well seeing as both players and NPC's are created into the new world in their game avatars, it should be safe to assume that both NPC's and players both have the same physiology if they are the same race. So a human NPC and a human player should both be fertile unless they have some special backstory, skill, curse or whatnot that prevents conceiving children. I mean there are children of players, so it should be safe to assume that NPC's can also have them.
However, an NPC will most likely never have a child unless a player directly tells them to make some, also while some race combinations are impossible, in the story there have been some mixed races shown like a half-elf or the human queen with dragon blood. Overall as mentioned above most likely humanoid races can interbreed but they can't breed with demihumans perhaps. A lot of the lore is based on H.P Lovecraft and a lot of western and eastern stuff.
In a lot of those kinds of stories/legends, it is fairly common for demonkind/heteromorphs to impregnate female humans to give birth to demons/monsters or half-demons.