By Anchalee Worrachate Nov. 3 (Bloomberg) -- The cost of borrowing in dollars in London fell on speculation European policy makers will join counterparts in Asia in slashing borrowing costs this week to loosen lending by banks and limit damage from a global recession. The London interbank offered rate, or Libor, that banks charge one another for three-month loans in U.S. currency slid 17 basis points to 2.86 percent today, the lowest level since the failure of Lehman Brothers Holdings Inc. on Sept. 15, data from the British Bankers' Association showed. The overnight rate dropped 2 basis points to 0.39 percent. Asian rates declined. ``Interest-rate cuts will help,'' said Jan Misch, a money- market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned lender. ``The most important factor is that we haven't had bad news in terms of corporate or bank trouble for a few days. My view is that sentiment in the money market will improve further this week.'' The European Central Bank and Bank of England will lower their benchmark interest rates by 50 basis points on Nov. 6, according to Bloomberg surveys. The Reserve Bank of Australia will also cut its overnight cash rate target by 50 basis points tomorrow, economists predict. The Reserve Bank of India lowered its benchmark interest rate two days ago for the second time in two weeks. Interest-rate cuts from Beijing to Oslo to Washington represent another salvo from central banks in their efforts to thaw a more than year-long freeze in credit. The U.S. committed $700 billion to bail out financial institutions, while policy makers in Europe have offered unlimited funding to revive lending. The Libor for three-month euros fell 3 basis points to 4.74 percent, the 18th straight decline, according to BBA data. Credit Freeze The declines in Libor signal as much as $3 trillion of emergency funds provided by governments to battle a collapse in trust among banks may be working. The drop in three-month dollar Libor last week capped the first monthly slide since May. Credit markets seized up in August 2007 after BNP Paribas halted withdrawals on three funds. The market froze after Lehman filed for bankruptcy, sparking concern more banks would fail. Perception of credit quality improved in Europe, with the cost of protecting corporate bonds from default falling today. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings decreased 31 basis points to 754, according to JPMorgan Chase & Co. Libor-OIS The Libor-OIS spread, which former Federal Reserve Chairman Alan Greenspan said in June should serve as a measure for determining when markets have returned to normal, fell 15 basis points to 224 basis points today, compared with 364 basis points on Oct. 10. The spread was 87 basis points on Sept. 12, the last working day before Lehman filed for bankruptcy. The spread measures the difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate. In a sign banks remain wary, HSBC Holdings Plc, Europe's biggest lender, signaled it won't pass on to consumers or businesses the full effect of interest-rate reductions from the Bank of England, defying a call from U.K. Prime Minister Gordon Brown to revive lending. Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association before noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year. Asia Rates The three-month interbank offered rate for Hong Kong dollars, or Hibor, declined 26.5 basis points today to a six-week low of 3.08 percent, data from the Hong Kong Association of Banks show. The comparable rate for U.S. dollar loans in Singapore, or Sibor, fell 16 basis points to 2.93 percent, the lowest since Sept. 16. The ECB will cut its benchmark rate to 3.25 percent, after lowering it by 50 basis points to 3.75 percent on Oct. 8, according to all 51 economists in a Bloomberg Survey. The median of 60 economists in another Bloomberg survey predict the Bank of England will lower its main rate to 4 percent. In Australia, the central bank will cut its overnight rate to 5.5 percent tomorrow, according to 15 to 16 economists surveyed by Bloomberg News. Last week, the Bank of Japan lowered its benchmark overnight interest rate by 20 basis points to 0.3 percent on Oct. 31, two days after the Fed reduced its target rate 50 basis points to 1 percent, matching a half-century low. The Fed agreed last week to pump $120 billion into Brazil, Mexico, South Korea and Singapore to alleviate demand for dollar-based funding. Norway, Taiwan and Hong Kong also trimmed rates last week. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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