European Central Bank warns of losses as inflation rates increase
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The European Central Bank has warned that it could make losses amid high interest rates. The rising inflation levels have forced the ECB to hike interest rates as it bears the costs of the aggressive money printing moves in the past decade.
European Central Bank warns of losses
The ECB has been raising interest rates to tame the rising inflation levels. Because of increasing these rates, the ECB will be forced to make high interest payments to commercial banks on the 5 trillion euros worth of deposits created through cheap loans and large bond purchases.
As inflation levels remained relatively low in the past years, the ECB introduced several stimulus tools. Now, these tools will lead the ECB and some of its shareholders, such as the central banks of Belgium, Germany, and the Netherlands, to make drastic changes. These central banks could eventually be forced into seeking a bailout, which will raise concerns about the independence of these institutions.
The ECB has said that by fighting inflation through increasing interest rates, it had raised the interest expenses paid to commercial banks. This has dented the ECB’s profits, with the institution warning of possible losses.
The central banks that will be most affected are those holding the largest share of bank deposits. The Dutch national central bank has admitted that it faces a high risk and might seek additional capital from the government.
ECB has other lines of defense
The ECB is largely owned by the central banks of 19 countries that use the euro, comprising 8% of the balance sheet of the Eurosystem. The bank has said that it had other means to explore to achieve the needed capital. Some of these methods include tapping into the income that central banks made on their monetary policy operations, including bonds and loans.
The bank could also defer any additional losses by including them on its balance sheet as a claim against future profits. Nevertheless, the ECB added that the easing of interest rates could support the profitability of the Eurosystem in the medium term.
The ECB doctrine requires that the institution have enough capital to ensure that it remains independent and to boost its credibility as an institution that can tame inflation levels. Over the years, the eurozone countries have derived benefits from the easy policy of the ECB by lowering borrowing costs and through the dividends paid by national central banks.