Despite shrinking deficit and cooling inflation, eurozone central bank says impact of past tightening cycle still weighing on its balance sheet…..
The European Central Bank (ECB) recorded its third straight annual loss in 2025, as the financial aftershocks of its historic interest rate hiking campaign continued to weigh on its balance sheet.
The Frankfurt-based institution reported a loss of €1.25 billion ($1.47 billion) for the year, a sharp improvement from the record €7.9 billion shortfall posted in 2024, but still a sign that the consequences of its inflation fight are lingering.
The ECB first slipped into the red in 2023, marking its first annual loss in nearly two decades. That reversal followed an aggressive tightening cycle launched in 2022 to rein in surging inflation triggered in part by Vladimir Putin’s full-scale invasion of Ukraine.
The cost of fighting inflation
After years of ultra-low interest rates, the ECB moved rapidly to raise borrowing costs across the 21-country euro area. While those hikes were aimed at households and businesses to curb price growth, they also had unintended consequences for the central bank itself.
“The losses since 2022 come after many years of substantial profits and are the result of policy actions,” the ECB said, describing the tightening measures as necessary to restore price stability.
Higher interest rates increased the ECB’s own interest expenses, straining its financial position. Although the losses have narrowed significantly, the effects of the earlier rate surge are still filtering through its accounts.
Turning the corner?
Inflation across the euro area has now cooled markedly. In January, it dipped below the ECB’s two-percent target, a milestone that underscores how dramatically price pressures have eased compared to the peak of the crisis.
Since mid-2024, the central bank has begun lowering rates, shifting from tightening to cautious easing. However, officials cautioned that the financial benefits of rate cuts take time to materialize.
Still, the ECB said interest expenses in 2025 were already substantially lower than the previous year and expressed confidence that it could return to profit either this year or next.
The central bank also stressed that its operational capacity is not undermined by temporary losses, noting it can function effectively “regardless of any losses.”
Lagarde: Inflation fight is working
Speaking before the European Parliament, ECB President Christine Lagarde acknowledged the strain the inflation surge had placed on the region.
“The euro area has faced an exceptionally challenging environment over recent years, with high inflation affecting both households and firms,” she said.
But she struck an optimistic tone about the outcome of the central bank’s policy response.
“We can now see, however, that our efforts to bring inflation down have been effective.”
With inflation cooling and losses narrowing, the ECB appears to be entering a new phase, one defined less by emergency tightening and more by careful normalization, even as it works to restore its own financial footing.
