* Traders eyeing ECB repayment to gauge pace of rate rises
* Bumper repayment to push short-term borrowing costs up
* Limited scope for low repayments to dull expectation
LONDON, Jan 31 (Reuters) - Money market traders may need to reappraise the likely speed of short-term rate rises on Friday when they find out how far banks intend to use their second chance to return emergency loans.
Markets moved quickly to factor in a steady rise in money market rates last week after the European Central Bank announced that 137 billion euros ($186 billion) of the three-year loans - more than most had expected - would be repaid at the first opportunity.
The loans are widely credited with helping to calm financial markets after the euro sovereign debt crisis intensified during 2011. The second batch of repayments will be announced at 1100 GMT on Friday and will help traders gauge whether the interest rate repricing will continue, stall or reverse.
"It will be important to see from tomorrow's data whether the repayment is a trend or just one big number at the beginning," said ING rate strategist Alessandro Giansanti.
"If you started to see a stronger pace of refinancing repayment now, then you will see the curve will flatten as even front-end maturities start to rise, because the market will believe that normalisation will occur quicker."
A Reuters poll showed banks are expected to repay 20 billion euros this week, although expectations ranged widely.
The principal effect of last week's surprise was that longer-dated Euribor contracts fell and the cost of securing long-term, fixed-rate interbank loans rose, implying that money market rates would rise but only over the medium term.
A fall in Euribor futures shows the market now expects interbank rates for December to be 14 bps higher than it did a week ago, and the spread between the December 2013 and 2014 contracts has widened 6 basis points.
This steepening of short-term rate curves indicates the excess of cash in the euro zone banking system will eventually fall to 'normal' levels and that will squeeze interbank lending costs higher as banks compete for scarcer funding.
The Eonia overnight interbank borrowing rate currently sits at 8 basis points, an artificially low level, thanks to the current 457 billion euro cash excess.
Under normal monetary conditions - generally regarded as less than 200 billion in excess liquidity - historical averages show Eonia would trade around 10 basis points away from the refinancing rate, currently at 75 basis points.
Analysts said the expectation of higher rates could build as money continues to drain from the system, and was unlikely to unwind even if the pace of repayments is slower than consensus at first.
"If we get a payment of 10 to 20 billion then you're really talking about a curve that remains elevated but not running away to the upside. It's going to be more gradual," said Orlando green, strategist at Credit Agricole in London.