IMF Working Papers

Raising Rates with a Large Balance Sheet: The Eurosystem’s Net Income and its Fiscal Implications

Author/Editor:

Nazim Belhocine ; Ashok Vir Bhatia ; Jan Frie

Publication Date:

July 7, 2023

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

The Eurosystem, having purposefully expanded its footprint in recent years, confronts a period of loss-making as rising policy rates lift the remuneration of bank reserves while assets churn more slowly. This paper projects the net income of the Eurosystem and its “top-five” national central banks over a ten-year horizon, finding that losses, while large, will be temporary and recoupable. The policy conclusions are fourfold. First, the temporary and recoupable nature of the loss-making obviates any need for capital contributions or indemnities from the state, instead allowing losses to be offset against future net income. Second, it must nonetheless be communicated that fiscal impacts will be material, with annual taxes and transfers of 0.1−0.2 percent of GDP giving way to potentially long interruptions in some cases. Third, more-conservative profit distribution policies in the future steady state could help mitigate the on-off pattern of dividends. Finally and most vitally, loss-making must remain orthogonal to monetary policy decision-making, as indeed it is at the ECB. Ultimately, credibility will rest on performance in delivering on the price stability mandate.

Series:

Working Paper No. 2023/145

Subject:

Central bank policy rate Financial services Financial statements Income Monetary policy National accounts Public debt Public financial management (PFM) Unconventional monetary policies

Frequency:

regular