FRANKFURT (Reuters) – Euro zone banks are set to repay early another 447.49 billion euros in multi-year loans from the European Central Bank next week, the ECB said on Friday, which will mark another step in reducing its oversized balance sheet.
Banks had until recently been sitting on 2.1 trillion euros worth of cash from the ECB’s Targeted Longer-Term Refinancing Operations, launched to encourage lending and spur economic activity when the euro zone was threatened with deflation.
They repaid 296 billion euros last month after the ECB jacked up borrowing costs in the hope that banks would rather hand back the funds than pay the extra interest.
The early repayments are part of the ECB’s efforts to tighten financing conditions, to temper demand and ease inflation which hit a record high 10.6% in October.
At 8.5 trillion euros, the ECB’s balance sheet is still exceptionally large by historic standards and the bank is expected to outline plans next week on reducing it further.
The next step will be to let some of the 5 trillion euros of debt it holds expire but this process is likely to be gradual and the reduction is set to be small, at least initially.
Analysts polled by Reuters see the bond holdings shrinking by only 175 billion euros next year.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)
