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Bundesbank braces for ECB-buying losses after lowest profit in decade

By Francesco Canepa

FRANKFURT (Reuters) - Germany's central bank posted its smallest profit in more than a decade in 2016 after setting aside money against potential losses on the bonds it is buying as part of the European Central Bank's stimulus programme, its annual report showed on Thursday.

The drop in profit translates into a smaller contribution to Berlin's federal budget and, coupled with the threat of losses in the future, is likely to strengthen already sharp German criticism of the ECB's quantitative easing.

"It is fair to ask ... when we can take our foot off the monetary policy pedal," Bundesbank President Jens Weidmann said while presenting the report.

"Especially since the ultra-accommodative monetary policy is being implemented in key measure through the large-scale purchases of government bonds, which, as you know, I am very critical of."

The Bundesbank recorded a net profit of 399 million euros (£337 million), the lowest since 2004 and a far cry from the 3.2 billion euros in 2015.

The fall was largely due to higher provisions against paper bought as part of the ECB's asset buying - which since June includes corporate bonds - and against cheap loans extended to banks.

"The purchases of long-term securities (at very low interest rates) for monetary policy purposes and the new targeted longer-term refinancing operations (four-year maturity at a negative interest rate) have given rise to ... mounting interest rate risk," the Bundesbank said in the report.

This led the Frankfurt-based central bank to increase its provisions to 21.9 billion euros from 19.6 billion euros a year earlier.

So far, however, the bank is making profits on its bond holdings.

Ironically, this is mainly thanks to bonds from troubled countries such as Greece, bought at very high yields and against the opinion of Germany's own representative on the ECB's board, during the 2010-12 debt crisis.

By contrast, the predominantly German public sector paper bought as part of the asset-buying programme since 2015, some of which yields less than zero, resulted in a small loss for the Bundesbank.