Interbank lending rates continue to fall

Published: Tuesday | December 23, 2008

The cost of three-month dollar loans between banks fell Monday in the wake of last week's decision by the United States Federal Reserve to cut its benchmark rate to near zero per cent.

The interbank lending rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - fell around 0.03 percentage points to about 1.47 per cent, according to the British Bankers' Association.

The fall came after the Fed cut its federal funds rate from 1.0 per cent to a range between zero and 0.25 per cent and said it would use "all available tools to promote the resumption of sustainable growth and to preserve price stability".

Meanwhile, the rate for three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - also decreased around 0.03 percentage points to 3.05 per cent, while the equivalent rate for pounds fell about 0.05 percentage points to 2.94 per cent.

Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals.

Rates have been high in recent months as banks have hoarded cash and worried that other lenders might collapse and not pay them back.

All three lending rates still remain well above their benchmarks set by central banks and expectations of where they will be in three months time. Both the Bank of England and the European Central Bank are expected to cut their benchmark rates from the current 2.0 per cent and 2.5 per cent early in the new year amid falling inflation and continuing poor economic data.