Banks' cash injection good news for borrowers
The rate of interest at which banks lend to each other has fallen following an injection of cash into the money markets by a group of central banks.
The unprecedented move by the Bank of England, the US Federal Reserve and the European Central Bank as well as the national banks of Canada and Switzerland, has forced the three-month London Interbank Offered Rate (Libor) down to 6.514% from 6.627%.
The central banks have collectively made up to £54bn ($110bn) available to the world money markets in the form of loans.
The move is good news for consumers. Although the Bank of England’s decided to slash interest rates by 0.25% at the beginning of December, this failed to curb Libor rates - heightening fears that mortgage borrowers could suffer.
If banks were continued to have to pay a lot of interest when borrowing from each other, then analysts warned that mortgage and other loan rates could increase.
It is hoped that the injection of cash – which could mollify those banks who have suffered losses during the credit crunch – will increase mortgage lenders’ appetite to lend.
However, some economists and analysts remain unconvinced that the move will be enough to counterbalance the slowing housing market’s toll on the economy and keep the anticipated economic slowdown in 2008 at bay.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.