The Bundesbank posted a profit of €2.0 billion for the 2017 financial year, representing a year-on-year increase of €1.0 billion. Following an allocation to the reserves, the Bundesbank transferred the remaining distributable profit of €1.9 billion in full to the Federal Ministry of Finance. Distributable profit had stood at €399 million in 2016.

"The accommodative monetary policy that was pursued in 2017 once again led to an expansion of our balance sheet," Bundesbank President Jens Weidmann noted at the press conference presenting the Bank’s annual accounts in Frankfurt am Main. Mr Weidmann explained that the higher profit for the year mainly came about due to an increase in deposits by credit institutions, which are currently being charged negative interest rates by the Bundesbank. He went on to say that, by contrast, given the current low-interest-rate environment, there is de facto no interest income on the assets side. "This means that our usual income situation has been reversed. In ‘normal times’ it is the assets which generate income, notably refinancing operations with banks," Mr Weidmann commented. "Now it is the opposite way around."

However, the Bundesbank President believes that it would be wrong to benchmark the monetary policy decisions against the central bank’s profit or loss, remarking that the sole benchmark is whether monetary policy succeeds in preserving price stability.

Risks are rising

"The continuation of the asset purchases has driven up interest rate risk," Mr Weidmann observed. It was this that prompted the Bundesbank to step up its provisions for general risks yet again, adding €1.1 billion to bring the total to €16.4 billion.

The Bundesbank took interest rate risk into account for the first time in the 2016 financial year. It is caused by a growing balance sheet mismatch between long-term assets and short-term liabilities. The long-term assets purchased under the asset purchase programmes and longer-term refinancing operations will yield very low interest income for the Bundesbank for many years to come, while the income generated by the negative interest rates on deposits can quickly turn into interest expenditure if policy rates pick up.

Interest income is continuing to grow

Together with the negative remuneration of credit institutions’ deposits, negative interest rates on the euro balances of domestic and foreign depositors such as general government and foreign central banks was the most important item on the profit and loss account for 2017. According to Bundesbank Executive Board member Carl-Ludwig Thiele, whose responsibilities include overseeing accounting and controlling, this item rose by €1.8 billion last year to €3.2 billion. "But this development is not sustainable," he warned. "This income will cease to exist once interest rates pick up." Interest income as a whole went up by €1.5 billion to €5.2 billion in 2017. Given that interest expenditure rose slightly, net interest income increased by a substantial €0.9 billion to €4.2 billion.

Total assets hit new record high

"As a result of the Bank’s monetary and foreign exchange operations, total assets rose sharply once again – as they did in 2016 – and climbed to a new record of just over €1.7 trillion in 2017," Mr Thiele observed, adding that total assets had increased by more than €330 billion on the year. He identified the asset purchases for monetary policy purposes and the liquidity inflows from other countries in Europe as the main factors driving the balance sheet expansion. The Bank’s TARGET2 claims on the European Central Bank (ECB) had increased by €153 billion to €907 billion, he explained, causing it to almost double within the space of the last three years.

Upswing rests on a broad base

Bundesbank President Jens Weidmann said that the economic performance in Germany and the euro area is very satisfactory. "The upswing now rests on a broad base everywhere," he remarked, given that overall euro area growth amounted to 2.5% last year. According to Eurosystem forecasts, the economic recovery will continue, with economists expecting a growth rate of 2.3% this year. Mr Weidmann believes that the German economy is currently booming, what with expansion by a seasonally and calendar-adjusted rate of 2.5% overall in 2017 and a similar growth rate expected by the Bundesbank for this year.

In Mr Weidmann’s view, the robust state of the euro area economy confirms the belief that inflation will move towards the inflation target of below, but close to, 2%. "I believe it is important to gradually and dependably reduce the degree of monetary policy accommodation when the outlook for price developments in the euro area permits us to do so," the Bundesbank President stressed.