The European Central Bank (ECB) has reported an annual loss for the third year in a row, marking the longest consecutive period of deficits since the institution's founding, as it continues to grapple with the aftereffects of crisis-era policies.

According to a statement released by the ECB on Thursday, the shortfall for 2025 amounted to 1.3 billion euros (approximately $1.5 billion). This figure represents a significant improvement compared to the previous year's record loss of 7.9 billion euros.

The ECB reaffirmed that its ability to function effectively remains intact, regardless of whether it posts a profit or a loss. As in previous years, the 2025 deficit will be carried on the ECB's balance sheet to be offset against future profits. Consequently, the ECB will not distribute any profits to the national central banks of its member states this year.

Looking ahead, the ECB anticipates a return to profitability either this year or in 2027. The precise timing will depend on the level of the ECB's key interest rates and foreign exchange rates, as well as the size and composition of its balance sheet.

The financial strain stems from a situation where the ECB currently pays more in interest than it earns from bonds purchased at low borrowing costs during past emergency periods. Although this asset-liability mismatch is expected to persist, the financial pressure has lessened. This is due to inflation stabilizing near the target level, prompting policymakers to reduce the benchmark borrowing cost from 4% to 2%, coupled with a continued reduction in the size of the balance sheet.

The sequence of annual losses has sparked discussions concerning central bank independence and policy tools. Some policymakers have urged greater caution regarding future asset purchases, with market speculation even suggesting that the central bank might eventually require government financial support, a move that could jeopardize its independence.

During last year's strategy review, the ECB retained all its policy tools, including quantitative easing (QE), but did not specify the conditions for their use. However, commentary within the review and statements from some officials imply that future deployment of QE might be more restrained, taking into account knock-on effects such as financial losses and potential asset bubbles.

Significant volatility in gold and foreign exchange markets substantially impacted the ECB's profitability last year. Driven by rising prices, the euro-denominated value of the ECB's gold reserves surged by 46%, reaching a total of just under 60 billion euros.

Conversely, the value of the ECB's holdings in US dollars and Japanese yen decreased, primarily due to the depreciation of those currencies. As part of routine rebalancing operations of its foreign reserve structure, the ECB sold US dollars in the first quarter of 2025, realizing a profit of 909 million euros, which was fully reinvested into Japanese yen.

Notably for investors, while the ECB still maintains some provisions to hedge against the risk of further US dollar weakness, its buffer funds to cushion against additional depreciation of the Japanese yen have been entirely depleted. This means the ECB would be directly exposed to new loss risks if the yen's exchange rate were to decline further.