FRANKFURT (Reuters) - Banks will next week return 3.59 billion euros ($4.8 billion) of crisis loans early to the European Central Bank, the ECB said on Friday, a lower than expected total as a recent rate cut makes it more attractive to hold on to the funds for now.
The ECB cut its main refinancing rate to a record low of 0.25 percent, automatically reducing the interest rate banks have to pay on the three-year loans.
Next week's repayments fell short of estimates in a Reuters poll of euro money market traders, which had expected them to return 4 billion euros.
By repaying the ECB's crisis funds early, banks are further reducing the level of excess liquidity - cash beyond what lenders need to cover their day-to-day operations - in the system, from 169 billion euros currently.
Short-term money market rates are seen rising closer to the ECB's main refinancing rate once excess liquidity falls below a threshold estimated to be in the range of 100 billion to 200 billion euros.
The ECB is monitoring this development as higher bank-to-bank borrowing costs could undermine the euro zone's fragile recovery.
The ECB last week extended the timeframe during which it will provide banks with all the cash they request in liquidity operations at least until July 2015 and left the door open for further rate cuts and other steps.
Fourteen of 19 money-market traders expect the ECB to conduct another long-term refinancing operation (LTRO), probably with a maturity of three years, a Reuters poll showed earlier this week.
Eight of those 14 said the ECB would do so in the first quarter of next year, one said it would be earlier than that and four said later.
The ECB flooded the market with more than 1 trillion euros in two LTROs in December 2011 and February 2012 to ease banks' funding strains.
The three-year loans from the ECB will mature in early 2015 and banks now have the option to repay them early.
They have already returned about a third of the money.
On Friday, the ECB said five banks would repay 3.155 billion euros from the first LTRO on November 20, and three banks will pay back 0.431 billion euros from the second LTRO.
($1 = 0.7430 euros)
(Reporting by Frankfurt newsroom; Editing by David Holmes)