3 month Libor rate falls

The London interbank offered rate (Libor) for three months loans has fallen to a five month low to 2.51 percent from 4.82 in October as a result of credit markets struggling following the biggest fall on record.

The rate that banks charge each other to borrow dollars is still higher than the US Federal Reserve’s target rate, however compared to prior the credit crunch, rates still have a long way to go as banks are still cutting back.

Since the downturn in the economy, banks are still unwilling to lend even though most developed economies have changed policy to increase liquidity as government bailouts are now around the 3 trillion dollar mark.

This cash injection alongside the continued interest rate cuts in the world’s major economies have driven central banks to lower the Libor.

Despite this, banks have not been convinced to increase lending as a recent report highlighted that 85 percent of US banks have actually had to tighten their lending terms and standards.

The Libor rate in the UK is managed by the British Bankers’ Association and is set up a panel of 16 banks, so there has been much debate about the manipulation of figures as the rate is dependant on the estimated cost of borrowing across the 10 major world currencies.

The good news though is that the Libor rate has fallen, however it is too early to see it as a sign of great improvement until the fall is translated to the money markets.

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