ECB makes first loss since 2004 due to higher interest costs

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The European Central Bank has announced its first annual loss for almost two decades, prompting policymakers to carry forward an annual deficit to offset against future profits for the first time.

The €1.3bn loss for 2023 reflects the impact of higher interest rates paid to national central banks, which the ECB has raised to a record level in response to the biggest surge in inflation in its history.

The central bank would have made a much bigger loss last year if it had not drawn on the remaining €6.6bn of provisions it built up in recent years to cover financial risks.

Higher rates pushed up the ECB’s net interest expense, reflecting a sharp rise in interest paid to other national central banks that share the euro, from €900mn in 2022 to €7.2bn last year. 

However, the interest the ECB earns on the vast portfolio of bonds bought over the past decade has not increased anywhere near as much as many of these are long-term government securities that have locked in low or even negative rates for many years.

Central bank losses are likely to be seized on by critics of their recent massive bond purchases, with one case against this still pending in the German constitutional court. Public finances will also be hit by an end to the big dividends finance ministers were used to receiving from central banks.

But while the loss could increase political pressure on the ECB and threaten its independence, most analysts think it should not matter whether central banks are profitable.

“I don’t see any meaningful implication for policy at this stage,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

One concern had been that governments might need to bail out some northern central banks with the highest losses, such as the Dutch one. But this risk faded after De Nederlandsche Bank agreed a plan with the government to rebuild its capital from future profits.

The downturn in the ECB’s financial outlook had already forced it to scrap the dividend it pays to national central banks last year. These dividend payments — which amounted to €5.8bn between 2018 and 2022 — are usually passed on by national central banks to eurozone governments.

The central bank said it was “likely to incur losses over the next few years, but is then projected to return to making sustained profits”. It added that its balance sheet was backed by its capital and “substantial revaluation accounts”, which together totalled €46bn at the end of last year.

“In any case, the ECB can operate effectively and fulfil its primary mandate of maintaining price stability regardless of any losses,” it added.

The last time the ECB made an annual loss was in 2004 when it was hit by foreign exchange losses due to the rapid appreciation of the euro, but it absorbed that loss rather than rolling it forward. Last year, the ECB made zero profits as it used provisions to offset a €1.6bn deficit.

The ECB has been slowly reducing the €4.7tn bond portfolio it owns along with the eurozone’s national central banks since last year, while the ultra-cheap loans it gave to commercial banks during the pandemic have also been expiring.

These moves helped to shrink the balance sheet of the eurosystem — which includes the ECB and 20 national central banks — to €6.94tn at the end of last year — down from a peak above €8.8tn in mid-2022.