European Central Bank’s Aggressive Monetary Policy Leads to Unprecedented Financial Losses

The European Central Bank recorded a historic loss in 2024 due to its aggressive interest rate hikes aimed at curbing inflation, Bloomberg reported. The ECB’s deficit for the year reached €7.94 billion, as the interest expenses on its liabilities exceeded the income generated from bonds purchased when borrowing costs were significantly lower. The agency noted that a similar outcome would have been reported in 2023 if not for the use of risk provisions to cushion the impact.

In 2023, the ECB had already posted a €1.27 billion loss after depleting all its risk provisions, which totaled €6.62 billion. The combined losses from the past two years now amount to €9.21 billion and will be carried forward to be offset by future profits. Despite this, the central bank stated that it can continue to function effectively and fulfill its mandate of maintaining price stability, regardless of financial losses.

The ECB attributed its negative result to policy measures taken by the Eurosystem, which were deemed necessary to ensure price stability. The financial strain on the ECB mirrors a global trend, where central banks have faced the consequences of rapidly rising inflation, necessitating sharp interest rate increases. These measures followed a long period of loose monetary policy, during which large-scale bond purchases were used to stimulate economic activity. The shift in interest rates has led to a mismatch that will persist for some time.

Although further losses could occur in the coming years, they are expected to be smaller than those seen in 2023 and 2024. This is largely due to the ECB’s strategy of reducing its balance sheet by allowing maturing bonds to expire and the potential for future interest rate cuts. Over time, the ECB is expected to return to profitability.

The ECB emphasized that its financial position remains strong, with capital and revaluation accounts totaling €59 billion at the end of 2024. A significant portion of this strength came from the rise in gold prices, which alone contributed over €10 billion.

In recent years, public debates over the ECB’s financial losses have subsided, and eurozone finance ministries have accepted that they will not receive any profit distributions for now. However, the role of quantitative easing remains a central topic in the ongoing review of the ECB’s monetary policy strategy. While most officials view bond purchases as a crucial tool during economic crises, some have pointed to their drawbacks, including market distortions and continued financial losses.

ECB Executive Board member Isabel Schnabel highlighted these concerns in November, warning that even though central banks do not operate for profit, significant financial losses could still impact public confidence in their policies.