US, European interbank lending rates drop modestly
Pan PylasInterest rates on three-month dollar loans between banks fell for the first time in four days Tuesday as the equivalent European rates were falling ahead of this week's expected rate cuts from the European Central Bank and the Bank of England.
The rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — inched down by 0.01 percentage point to 2.21 percent, according to the British Bankers' Association.
Meanwhile, the rate for three-month loans in euros — known as the European Interbank Offered Rate, or Euribor — decreased by nearly 0.04 percentage points to 3.79 percent, its lowest level since February 2007, while the equivalent rate for pounds fell to 3.84 percent from 3.88 percent Monday.
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 remain above their benchmarks set by central banks — 1 percent in the U.S., 3.00 percent in Britain and 3.25 percent in the 15-nation euro zone.
The spread between bank lending rates and the official base rate in Europe are narrowing quite sharply towards more normal levels. At only 0.54 percent, the spread is back near the 0.5 percent level it was before the credit crunch began around August 2007.
However, Marc Ostwald, a strategist at Monument Securities, said the narrowing of the spread is "largely cosmetic" ahead of this week's rate cuts in Europe.
While many observers think the European bank will reduce its benchmark rate by half a percentage point to 2.75 percent — with some thinking it may cut it by three quarters of a point_ the Bank of England is expected by many to lower its rate by a whole percentage point to 2.00 percent, which would be equal to its lowest level since the bank was founded in 1694.
"The narrowing of the spreads is more a function of what is being discounted in terms of rate cutting and I wouldn't be surprised that at Friday's fixing, the spreads will be back above 1 percent," said Ostwald.
Nevertheless, spreads have mostly fallen over the last month or so from well over 1 percent after massive intervention from governments and central banks — which on top of the latest fiscal stimulus plans included trillions of dollars in bank debt guarantees, pledges to rescue ailing banks, liquidity injections by central banks and interest rate reductions.