Central Banks struggle with the consequences of Monetary Policies

📌 The rapid increase in interest rates has posed significant challenges for central banks worldwide, particularly the Bundesbank and the Bank of Italy. These banks accumulated long-term bonds during the period of low interest rates under quantitative easing measures. However, the surge in rates has resulted in bond devaluation and economic imbalances.

📌 The Bundesbank, despite its prior criticism of quantitative easing, saw its German government bond holdings decline in value. This led to a loss of approximately €1 billion, with future losses expected to exceed €19.2 billion. Meanwhile, the Bank of Italy faced a devaluation of its bond holdings, resulting in losses of around €1.5 billion.

📌 These financial challenges have immediate consequences. Central banks may need to reduce shareholder remuneration to compensate their losses. For example, the Bundesbank, which had previously distributed €22 billion in dividends to the German government over the past decade, may adjust its remuneration policy due to the need to offset portfolio losses.

📌 While insolvency is unlikely, the financial stability of central banks remains crucial. The struggles faced by these institutions emphasize the delicate nature of their role in maintaining economic stability and their continued commitment to preserving independence.

Source: Repubblica