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The European Central Bank building in Frankfurt, Germany, February 3, 2022. /CFP
Eurozone banks are set to repay early another 447.5 billion euros ($472 billion) in multi-year loans from the European Central Bank (ECB), bringing the total reduction of outstanding loans to nearly 800 billion euros in just a few weeks, the ECB said on Friday.
Until recently, banks were 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 eurozone was threatened with deflation.
But inflation is now surging and the ECB raised borrowing costs on these loans last month, hoping banks would rather hand back the funds than pay the extra interest.
At 8.5 trillion euros, the ECB's balance sheet is still exceptionally large by historical standards, and the bank is expected to outline plans next week to reduce it further.
The next step will be to let some of the 5 trillion euros of debt it holds expire. However, this process is likely to be gradual and the reduction is set to be small, at least initially.
Analysts polled by Reuters predict bond holdings will shrink by only 175 billion euros next year.
(Source: Reuters with edits)
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