FRANKFURT (Reuters) – Eurozone banks will prepay to the European Central Bank (ECB) 447.5 billion euros of additional liquidity borrowed under the so-called “longer-term refinancing operations” (TLTRO) , the Frankfurt institution announced on Friday.
The ECB, which last month began the largest movement to reduce liquidity in the banking system since its creation, a further step in the fight against inflation after the interest rate hikes decided in recent months, had announced in November that the banks were going to reimburse it in advance 296 billion euros in loans. Loans worth 52 billion euros will also mature in December.
The total outstanding loans in the process of being returned now amount to nearly 800 billion euros in just a few weeks, underlined the institution headed by Christine Lagarde.
Banks have borrowed a total of some EUR 2.1 trillion from the ECB in recent years under TLTROs, taking advantage of very advantageous conditions, intended in particular to encourage lending and stimulate economic activity when the euro zone was then faced with a risk of deflation.
But in the meantime inflation, now at 10% over one year in the euro zone, has become a major concern for the ECB, which in October modified the conditions for TLTRO loans, thus hoping to encourage the banks to return this liquidity rather than to pay high loan interest.
The outstanding amount of funds granted under the TLTROs will still amount to 1,300 billion euros after the scheduled repayments, but a large part will expire next June.
Prepayments are expected to increase commercial bank funding costs and dampen business and consumer demand, contributing to lower inflation.
The ECB, whose balance sheet has reached 8,500 billion euros, a historically high amount, is due to present plans next week to reduce it further.
The institution could choose not to replace the approximately 5,000 billion euros of government and corporate bonds that it has bought in recent years when they reach maturity, but this is a slow and gradual process, at least in the beginning.
In a survey published on Friday by Reuters, analysts estimate that the ECB’s bond portfolio will shrink by only 175 billion euros in 2023.
(Report Balazs Koranyi, French version Claude Chendjou, edited by Blandine Hénault)