The European Central Bank (ECB) and the national central banks (NCBs) of European Union member states using the euro face “prolonged losses” brought on by higher borrowing costs, Fitch Ratings said in a new report on Monday (Sept. 9).
The credit rating agency estimated that the aggregate losses of the Eurosystem will amount to over EUR160 billion (averaging 0.2% of GDP per year) over 2024-2028 before provisions, reserves and taxes. Losses will decline over time as the ECB lowers its policy rate and the balance sheet shrinks. These losses will hit central banks’ capital and preclude transfers to their respective governments, putting additional pressure on public finances, Fitch warned.
Germany’s Bundesbank (BBK) and the Banque de France (BdF) will be hit the hardest, the agency said although the report does not foresee changes in credit ratings.
The ECB began raising rates sharply in mid-2022 and made its first cut in June 2024, reducing the key deposit rate to 3.75% from a record high of 4%. The Frankfurt-based financial institution’s governing council is expected to make another quarter-point cut this week and it will only be the ECB’s second rate reduction since 2019. Markets are also forecasting an additional cut in December, potentially totalling three 25-basis-point reductions in 2024.
Fitch predicted that the ECB’s monetary policy is unlikely to be impacted by profit and loss considerations. “Risks to monetary policy credibility from persistent losses are lessened by the fact that governments are unlikely to have to recapitalise them. We estimate that the four NCBs and the Eurosystem as a whole should retain positive overall net equity, and carry forward losses” the report said.
