The European Central Bank on Thursday reported its first annual loss since 2004, following hefty payouts due to higher interest rates.
It reported losses of 1.3 billion euros ($1.4 billion), which would have been steeper, had the bank not released 6.6 billion euros — its entire provision for financial risks, built up over a number of years.
The ECB said that it expected further losses for the following few years that would not impact “its ability to conduct effective monetary policy,” before returning to sustained profits.
The central bank hauled interest rates from negative territory to a record 4% between July 2022 and September 2023, in response to rising inflation in the wake of the Covid-19 pandemic and partially losing access to Russia’s energy following its invasion of Ukraine.
The institution suffered increased interest expenses on key liabilities, while interest income on assets did not keep pace, because many are on fixed rates or have long maturities, it said.
It logged a net interest loss of 7.19 billion euros in 2023, following a 900 million euro income in 2022.
“The financial strength of the ECB is further underlined by its capital and its substantial revaluation accounts, which together amounted to €46 billion at the end of 2023,” the central bank said in a statement.
The central bank said it will carry forward the loss on its balance sheet to offset against future profits. It will not make profit distributions to euro zone national central banks for 2023.
For eight years, the ECB followed a policy of fiscal stimulus that swelled its balance sheet, but was seen as controversial in some quarters. The central bank began quantitative tightening in March 2023.
Higher rates have pushed several national central banks to losses, including Germany’s Bundesbank and the Swiss National Bank.
While losses do not impact a central bank’s ability to enact on the mandate of maintaining price stability, annual figures are watched as a measure of credibility, and can impact wider actions.
Holger Schmieding, chief economist at Berenberg, said the ECB result was nevertheless “fully expected” and “not a major issue.”
“It won’t affect monetary policy. There is no institution in the economy which can cope with a temporary loss better than the central bank,” he told CNBC by email.