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Euro zone banks to repay another 63 billion euros worth of ECB loans

ECB building in fog, in Frankfurt

FRANKFURT (Reuters) - Euro zone banks are set to repay early another 62.7 billion euros in multi-year loans from the European Central Bank, bringing the total reduction of outstanding loans to nearly 860 billion euros in just a few months, the ECB said on Friday.

Banks had until recently been sitting on 2.1 trillion euros worth of cash from the ECB's Targeted Longer-Term Refinancing Operations (TLTRO), launched to encourage lending and spur economic activity when the euro zone was threatened with deflation.

But with inflation surging to record highs, the ECB is tightening policy and raised borrowing costs on these loans, hoping banks would rather hand back the cash than pay the extra interest.

Banks already cut their TLTRO holding by nearly 800 billion late last year and with Friday's repayment, outstanding funds will be around 1.26 trillion euros.

The early repayments are expected to raise bank funding costs and temper demand, all in the hope this will ease inflation, which is still above 9%, well above the ECB's 2% target.

At 8 trillion euros, the ECB's balance sheet is still exceptionally large but it is set to decline further in the coming months as the bank allows some of its bond holdings to expire.

(Reporting by Balazs Koranyi)