European Central Bank records loss after rate rises

THE European Central Bank has recorded its first loss in two decades after raising interest rates to record highs.

The Frankfurt-based institution lost €1.3bn (£1.1bn) last year, after breaking even in 2022.

The deficit was the first since 2004 and would have been far greater if the ECB had not deployed the full €6.6bn it had set aside in the past to soak up losses.

The central bank still has €46bn on its balance sheet. It said that last year’s deficit will be carried forward to be offset against future profits.

Officials said the slump into the red came after “almost two decades of substantial profits” and reflected the “necessary policy actions” taken to combat inflation.

Losses were incurred because of the ECB’S own interest rate rises, which forced it to pay out more to central banks across the eurozone.

The ECB began raising borrowing costs at an unprecedented rate in July 2022 after Russia’s invasion of Ukraine pushed up energy and food costs. It has held rates steady at a record 4pc since October in the face of cooling inflation and a stuttering eurozone economy.

These high rates mean the cost of the interest payments that the ECB makes to eurozone members’ national central banks has soared.

In 2022, the ECB’S net interest expense was €900m. Last year, it was eight times higher at €7.2bn. The ECB earns income on a large portfolio of bonds. However, the yields on these bonds have not increased at the same pace as interest rates because many were fixed when interest rates were much lower.

The central bank warned that it is “likely to incur losses over the next few years”, but should return to making “sustained profits” after that.