Banks will return 7.675 billion euros ($10.46 billion) of crisis loans early to the European Central Bank next week, the ECB said on Friday, driving the amount of excess liquidity down and closer to the threshold where market interest rates could rise.
By repaying the ECB's crisis funds early, banks also reduce the level of excess liquidity - the level of cash beyond what they need to cover their day-to-day operations - in the system.
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Excess liquidity is now at 217 billion euros, close to levels seen in late 2011, which was just before the ECB flooded the market with more than 1 trillion euros in long-term refinancing operations (LTROs) to ease banks' funding strains.
After the repayment next week the level will fall further if banks do not increase their uptake in new liquidity operations.
Short-term money market rates are seen rising closer to the ECB's main refinancing rate, currently at 0.5 percent, once excess liquidity in the system falls below a threshold estimated to be in the range of 100 billion to 200 billion euros.
The ECB is monitoring this development carefully as higher bank-to-bank borrowing costs could undermine the euro zone's fragile recovery.
The ECB is watching moves in market rates closely and is ready to use any policy option to temper them if needed, its president said on Wednesday.
Banks took more than 1 trillion euros of three-year loans from the ECB in two LTROs in December 2011 and February 2012, of which the first matures in January 2015.
They now have the option to repay the loans early and have returned about a third of the money already.
On Friday, the ECB said four banks would repay 4.610 billion euros from the first LTRO on October 9, and five banks will pay back 3.065 billion euros from the second LTRO.
A Reuters poll of euro money market traders had expected banks to return 3.0 billion euros next week.