FRANKFURT (Reuters) - Banks will return 3.116 billion euros (2.62 billion pounds) of crisis loans early to the European Central Bank next week, the ECB said on Friday, slowing the pace with which they reduce the amount of excess liquidity in the system.
The reduction in the level of excess liquidity - the level of cash beyond what banks need to cover their day-to-day operations - is one factor that has been driving money market rates toward the ECB's main refinancing rate in recent weeks.
The ECB is watching the development carefully.
On Thursday, ECB President Mario Draghi said the recent rise in such rates was "unwarranted". A week earlier, he said the ECB was ready to cut interest rates or pump more money into the euro zone economy if needed to bring down money market rates.
The policy option with fewest side effects to steer down market interest rates would be another ultra-long-term funding operation, or LTRO - a measure that could come with more favourable terms than the existing loans to attract banks.
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 almost a quarter of the money already.
On Friday, the ECB said two banks would repay 741 million euros from the first LTRO on September 18 and three banks will pay back 2.375 billion euros from the second LTRO.
A Reuters poll of euro money market traders had expected banks to return 3.25 billion euros next week.
Announcements on details of LTRO early repayments (bln euro) First LTRO (December 2011) Second LTRO (February 2012)
(Reporting by Frankfurt newsroom)