Libor the key to further interest rate cut

The key measure for interest rate cuts, as per future prediction, is the three month interbank lending rate, also known as the Libor rate.

The main rates in both euros and sterling have experienced steady falls, although the spread between the lending rates for banks and policy rates did increase, as it is becoming clearer that banks are no longer prepared to risk greater exposure to credit risks unless prompted to do so.

The Libor rate has fluctuated due to the effects of the economic downturn and the heightened fear over the US bank Citigroup.

The issue with the stuttering US economy is that it has a snowball effect that manifests itself in the banks’ reduced confidence in leading to each other as risk aversion increases, according to David Keeble, Head of Interest Rate Strategy.

Especially as we are entering the end of year period, tightening up is expected but not at this drastic level, as the whole market is seemingly playing it safe with equity markets suffering most, added Keeble.

The three month euro Libor rate fell 5 basis points to 4.004 percent, which is the lowest since April 2007, whilst the dollar rate continued to stall.

It was not until Alistair Darling pressed the banks into action that rates were eventually cut and the Council of Mortgage lenders has similarly announced that the real cost to borrowers and lenders is the Libor rate and not the Bank of England’s interest rate.

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