The European Central Bank (ECB) reported a loss of 1.25 billion euros ($1.47 billion) for 2025, marking its third consecutive annual deficit. This outcome is directly attributed to the lingering financial impact of its aggressive and record-setting interest rate hikes, implemented to combat unprecedented inflation.
While the 2025 shortfall represents a significant decrease from the all-time high loss of 7.9 billion euros recorded in 2024, it extends a challenging period that began with the ECB’s first annual loss in nearly two decades during 2023. These losses stem from the monetary tightening cycle that started in mid-2022, following Russia’s invasion of Ukraine, which triggered a surge in consumer prices across the eurozone.
The mechanism behind the losses is tied to the ECB’s balance sheet. For years preceding the hiking cycle, the bank operated in a low-interest environment that generated substantial profits from the spread between the fixed yields on its massive bond holdings and the minimal interest paid on commercial bank deposits. The rapid elevation of the ECB’s key interest rates inverted this dynamic. The institution now pays substantially more on excess reserves while earning fixed, lower returns on earlier asset purchases, resulting in a negative interest margin that persisted even after rate hikes paused.
The ECB stated that these losses, though substantial, follow many years of profit and are the result of necessary policy actions to secure price stability. That objective has largely been met, with inflation falling below the bank’s 2% target in January 2025. Consequently, the ECB has been lowering interest rates since mid-2024. The full benefit of these reductions on the bank’s income statement is delayed, but interest expenses in 2025 were already considerably lower than in 2024. The central bank projects a return to profitability in either 2026 or 2027 and underscored that its core monetary policy operations remain unaffected by the balance sheet losses.
Addressing the European Parliament, ECB President Christine Lagarde acknowledged the “exceptionally challenging environment” of recent years, where high inflation strained households and businesses. She affirmed that the central bank’s actions have been effective in restoring price stability. The consecutive annual losses highlight the fiscal cost of anti-inflation policy but do not impede the ECB’s primary mandate. Looking ahead, the bank’s focus is on carefully navigating the transition to a lower-rate environment to support economic growth while maintaining financial stability, with the expectation that improved net interest income will restore profitability in the near term.
