LONDON -- The cost of three-month dollar loans between banks fell modestly Wednesday as the bond markets reined in their expectations of upcoming U.S. interest rate hikes. The British Bankers' Association said the rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - was down 0.01 of a percentage point to 0.64 percent. Though the U.S. Federal Reserve is expected to keep its benchmark rate unchanged at a range between zero and 0.25 percent for a few months yet, the markets were beginning to price in the possibility that rates may start to rise by the start of next year if the recent improving economic dataflow continues. However, the markets have since pulled back those expectations somewhat. "Interest rate futures retraced some of their move over the past few days as markets reassessed expectations that the Fed will tighten this year," said Mitul Kotecha, an analyst at Calyon Credit Agricole. The equivalent rates for three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - and the Libor rate in British pounds were both unchanged at 1.28 percent and 1.26 percent, respectively. Interbank lending rates are important for the wider economy because they determine the cost of loans for households and businesses. They shot higher during the credit crunch but have been coming back down in recent weeks in the wake of massive efforts by governments and central banks to get lending going again.

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