Bundesbank posts first loss in over four decades as higher rates bite

FRANKFURT (Reuters) – Germany’s Bundesbank recorded its first loss in over four decades last year as a string of European Central Bank rate hikes reduced the value of its bond holdings and also generated a loss on ultra cheap loans to commercial banks, it said on Wednesday.

While the 172-million-euro ($183 million) loss was covered from provisions accumulated over the years, further losses are likely as interest rates keep rising, reducing the value of bonds accumulated during the years when inflation was very low.

It was the Bundesbank’s first loss since 1979.

“The earnings outcome now and in the coming years is ultimately the result of the extraordinarily expansive monetary policy of the past few years,” Bundesbank President Joachim Nagel said.

“A tight monetary policy is now required in order to restore price stability in a timely manner.”

For the Bundesbank, the erosion of its risk buffers is primarily an accounting issue because the bank can simply defer losses, much like it did in the 1970s, then build them back up when it turns a profit again.

Losses also don’t hinder the bank’s ability to carry out monetary policy operations – as long as investors don’t lose faith in its and the ECB’s status as credible inflation fighters.

But it will mean a loss of revenue for the German federal budget as the Bundesbank paid nearly 25 billion euros in dividends between 2010 and 2019 before it started building up provisions.

The German central bank’s loss comes just days after the ECB itself reported a 1.6 billion euro loss, raising questions about whether it might one day run out of buffers and who will foot the bill of its past largesse now that inflation is back and rates high.

($1 = 0.9398 euros)

(Reporting by Balazs Koranyi and Franceso Canepa; Editing by Kim Coghill)