The cost of three-month dollar loans between banks fell modestly for the second day running Tuesday while the equivalent rate in pounds failed to move much after the British government's second bank bailout.
The interbank lending rate on three-month loans in dollars—known as the London Interbank Offered Rate, or Libor—fell by around 0.01 percentage points to 1.12 percent. Over the last couple of weeks, the big falls in the dollar rate experienced in the early part of the year had moderated and turned into increases amid mounting concerns about capital shortages in banks.
However, last week's news that the U.S. government stepped in to shore up the finances of Bank of America Corp. and Citigroup Inc.'s announcement that it was splitting itself in two helped ease those concerns moderately.
Meanwhile, the equivalent rate for pounds fell about 0.01 percentage points to a fresh record low of 2.23 percent after the British government revealed a second rescue plan for the country's banks in just over three months, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.
The rate for three-month loans in euros—known as the European Interbank Offered Rate, or Euribor and fixed by the Banking Federation of the European Union—decreased around 0.04 percentage points to 2.37 percent, its lowest level since November 2005.
That decline came after the European
Central Bank's decision last Thursday to cut its benchmark interest rate another half percentage point to 2 percent, the equal lowest level since the bank was formed ten years ago.
Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals. Rates have been high during the financial crisis as banks have hoarded cash and worried that other lenders might collapse and not pay them back.
Though the interbank lending rates have fallen from highs over the last few weeks in the wake of large interest rate cuts around the world and massive central bank liquidity provisions, all three rates remain above the levels markets think benchmark interest rates will be in three months.
While the U.S. Federal Reserve cannot cut its benchmark rate further from the current 0-0.25 percent, the European Central Bank is expected to reduce its rate again from the 2 percent benchmark, and the Bank of England is tipped to cut its rates further in the coming months from its record low of 1.5 percent.
