The European Central Bank (ECB) reported a surprising loss in 2023—a result of a self-inflicted wound caused by abrupt policy changes in recent years.

In an ironic twist, the ECB is on the hook for $1.4 billion (1.3 billion euros) after it was forced to pay higher interest rates on trillions of euros’ worth of cash it printed several years ago when inflation was low.

But all the stimulus contributed to a massive spike in inflation, forcing the ECB to raise interest rates aggressively in 2022 and 2023. That meant the ECB was on the hook for higher interest payments to euro-area banks.

Elevated rates exposed the ECB to higher interest expenses on its liabilities, while interest income earned from bonds failed to make up the difference because many of these assets have fixed rates or long maturities.

The central bank said the losses would’ve been worse had it not released $7.2 billion in emergency funds it had set aside to cover financial risks.

All said, the ECB posted a net interest loss of around $7.8 billion, a stark reversal from the nearly $1 billion in income it reported in 2022.

“The loss [...] reflects the role and necessary policy actions of the Eurosystem in fulfilling its primary mandate of maintaining price stability and has no impact on its ability to conduct effective monetary policy,” the ECB said, referring to its dramatic policy shifts since Covid.

The ECB can reassure markets all it wants about its ability to “conduct effective monetary policy,” but the damage from years of excess money printing is starting to be felt. And it’s causing collateral damage.

Losses spread to German, Dutch central banks

The national central banks of Germany and the Netherlands also reported multi-billion euro losses for 2023 and warned of more financial pain to come.

They’re feeling the pinch of the ECB’s decade-long money printing before the pandemic. With $3.8 trillion (3.5 trillion euros) sitting in the financial system, the central banks are forced to pay out billions in interest, putting them at a steep loss for the year.

Germany’s Bundesbank lost $23.4 billion (21.6 billion euros) in 2023, erasing nearly all of the provisions it set aside to cover risks.

Its Dutch counterpart, De Nederlandsche Bank, also lost $3.8 billion (3.5 billion euros).

“The financial burdens are likely to persist for several years,” said Joachim Nagel, the Bundesbank’s president. “We [...] expect them to be considerable again for the current year.”

Analysts at Morgan Stanley expect losses at the ECB and national central banks to widen this year.

“We estimate that the Eurosystem will face losses of 56.6 billion euros in 2023, 62.2 billion euros in 2024 and 12.3 billion euros in 2025,” they said.

If that wasn’t bad enough, the ECB reported other red flags facing the European banking system—this time with direct implications for the economy.

Private sector lending declines

Bank lending to the private sector plunged by $13.2 billion (12.2 billion euros) in January, a sign that elevated interest rates were impacting borrowing across the Eurozone.

“High rates have crushed loan demand from firms and households,” Neville Hill, co-head of consultants Hybrid Economics, told the Financial Times. He’s worried that the ECB “has overtightened,” meaning that it spiked interest rates higher than consumers and businesses can handle.

If this continues, the Eurozone could be headed for stagnation or worse after the currency bloc narrowly avoided recession last year.

“The Eurozone economy escaped recession by the skin of its teeth by the end of 2023,” according to Diego Iscaro, head of Europe economics at S&P Global Market Intelligence. “The outlook for 2024 continues to be challenging amid faltering demand and increasing geopolitical tensions.”

According to the IMF, the Eurozone is expected to grow a meager 0.9% this year. Things could get worse if borrowing and consumption dry up.

The downstream effects of interest rates aren’t just being felt in the Eurozone. In the U.S., the Fed reported a record $114.3 billion loss last year due to interest expenses. And like the Eurozone, the U.S. has seen private sector borrowing decline because of elevated interest rates.