The European Central Bank (ECB) suffers the consequences of interest rate increases and closes 2023 with a loss of 1.266 billion euros. The impact is the interest expense, 7.193 billion euros. And the provisions of 6.6 billion were not enough to close the year on a positive note. It is, explains Frankfurt, the first red “in almost two decades”. And it may not be the last. It is “likely”, explains the report, that the ECB “will suffer losses in the coming years”, even if “it should then return to making sustained profits”. There will be no impact on the correct functioning of the institution, it may even operate with a negative balance sheet, but it represents a phenomenon that Frankfurt policymakers will have to monitor carefully.
A red limited only in part by provisions. The ECB is being hit by its actions to normalize monetary policy. After 450 basis points of increases, a journey that began in July 2022, the bill has arrived. Nothing that Christine Lagarde and her team hadn’t foreseen. But it’s still salty. For the first time in almost twenty years, Frankfurt closed its budget with a minus sign. To be precise, minus 1.266 billion euros. The impact was “the increased expense is due to the increase in the interest rate on main refinancing operations (MRO), which is the rate used to remunerate this liability, and which rose from an average of 0.6% in 2022 to an average of 3.8% in 2023”. Moral, 7.193 billion increase in spending. Only partially counterbalanced by the use of prudential provisions. The increase in the MRO rate also entailed an increase in the interest income accrued on the ECB’s share of the total euro banknotes in circulation and in the interest expense paid to the national central banks as remuneration for their credits with respect to the official reserves transferred to the ECB. , which amounted to 4.81 billion euros and 1.33 billion respectively. However, as explained by the ECB, there will be no disbursement of profits to Eurosystem banks.
The decision to use provisions for 6.6 billion is not an unusual choice. It was necessary to prevent the red from becoming even deeper. What worries analysts, however, is the future impact. As explained by Frankfurt, it is legitimate to expect that there will be consequences of rate increases on the ECB’s balance sheet in the years to come. Nothing dramatic, ECB sources warn, but a sign of the extraordinary times that the pandemic, war in Ukraine and conflict in the Middle East have produced from an inflationary point of view.
Meanwhile, the process of reducing portfolios continues, in line with what was decided by the ECB in the context of normalization after more than a decade of purchases of public and private securities, to stabilize the financial markets after the subprime crisis and the sovereign debt crisis . The total size of the ECB’s balance sheet decreased by €24 billion to €674 billion (2022: €699 billion). The decrease “is mainly due to the gradual decline in participations in the asset purchase program (App) following the only partial reinvestment of the capital repaid on securities maturing in this portfolio between March and June 2023 and the complete interruption of these reinvestments starting from July 2023″. A process that will continue throughout 2024, as already specified by the members of the ECB Board on several occasions.
Interest expenses are rising, but other budget items are also growing. Specifically, the ECB points out, total personnel costs increased to 676 million euros. In 2022 they were at 652 million euros). Among the reasons, highlights Frankfurt, “the higher average number of employees in 2023, mainly in banking supervision, and salary adjustments”. Precisely those used to combat inflation.