ECB unlikely to end sterilisation of SMP purchases - traders

BANGALORE (Reuters) - The European Central Bank will not stop sterilising bond purchases it made at the height of the euro zone's debt crisis, a majority of euro money market traders polled by Reuters said. The ECB bought bonds of some troubled peripheral countries through its Securities Market Programme (SMP) in an attempt to counter spiking yields as the crisis worsened. In order to keep the money supply stable and avoid fuelling inflation, it "sterilises" the purchases by offering deposits equal in value to the government bonds it holds. Eighteen of 23 traders polled expected the central bank to continue doing that, while only five said it would stop. Some economists and investors had expected the ECB to announce a halt to sterilisation at last Thursday's monthly policy meeting, to boost excess liquidity in the financial system and help bring down interbank lending rates. In the event, it left interest rates on hold and unveiled no other measures to bolster the fragile euro zone recovery, and ECB chief Mario Draghi said the benefits of not sterilising would be "relatively limited". The poll predicted that banks will repay 4.0 billion euros ($5.5 billion) of the ECB's three-year emergency loans next week, less than half the 11.4 billion euros they are set to return this week. The euro zone's central bank pumped over a trillion euros into banks' coffers in two long-term refinancing operations in December 2011 and February 2012 to help lenders ride out funding constraints. Banks have repaid a little more than half of those loans since January last year, helping push excess liquidity - cash beyond what lenders need to cover their day-to-day operations - down to levels seen before the twin ECB operations. This week's repayments are more than six times the amount that was expected, accelerating the drain of extra cash out of the bloc's financial system. When asked if the ECB would take steps to provide more liquidity, 14 of 24 traders said they would. Of those 14 traders who expect a boost, nine said it would come in six months, three in the next three months and the remaining two in a year. The regular survey showed banks are expected to borrow 90.0 billion euros at the weekly refinancing tender and 6.5 billion euros in a one-month operation. Eighty-seven billion euros is maturing this week for the one week tender and 6.5 billion euros for the one month. (Reporting by Siddharth Iyer; Polling by Diptarka Roy; Editing by Catherine Evans)