The European Central Bank racked up losses of €1.3 billion last year, the highest in two decades, after being stung by the impact of its rising interest rates.
The eurozone’s central bank posted an annual loss on its activities of €1.26 billion, which it will carry over and offset against future profits. The loss reverses more than 15 years of bumper profits generated as the bank was conducting quantitative easing while holding borrowing costs at record lows.
“The ECB is likely to incur losses over the next few years, but is then projected to return to making sustained profits. In any case, the ECB can operate effectively and fulfil its primary mandate of maintaining price stability regardless of any losses,” the central bank said.
Big central banks, including the US Federal Reserve and the Bank of England, are generating tens of billions of losses after starting to raise interest rates at the fastest pace in 40 years in 2022. Central banks, including the ECB, are paying out higher interest rates to commercial banks and, in the case of the UK, losing money by selling government bonds that have declined in value since monetary tightening began.
The ECB transferred €7.2 billion to its 20 national central banks, up sharply from the €900 million recorded in 2022, due to the tightening of its monetary policy. The central bank has lifted its main interest rate from 0.5 per cent in 2022 to 4.5 per cent, and is under pressure to ease monetary policy to support a flagging economy. It said its balance sheet had shrunk from €700 billion to €674 billion last year after it ceased quantitative easing.
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The ECB took action to reduce the volume of its balance sheet losses last year, and said it would only pay interest on a part of the reserves held by commercial banks, saving billions of euros a year in transfers. Similar measures for the UK have been supported by former Bank of England rate setters, including the former deputy governors Paul Tucker and Sir Charlie Bean.
The Bank of England is expected to generate losses of £170 billion over the next decades, a black hole that is covered by the Treasury.
