Libor Stays High as Base Rate Cuts are Forecast
Although the three-month Libor rate is remaining frustratingly high, there are expectations for the base rate to be cut again this year and throughout 2009, as forecasts are for inflation to come down, maybe as low as 1% in 12 months time.
Although share prices have made some recovery in the early part of this week, there is still a long way to go before the worst ills of the credit crisis are over. As the world lurches into recession, hopes that the mortgage market would pick up are not quite being fulfilled yet.
The London inter-bank three-month lending rate (Libor) which banks use to lend money to each other was stuck at 6.25% on Tuesday. This remains high and will not induce banks to begin to lend freely to each other yet. This is a concern after the Bank of England – and other major banks around the world – lowered interest rates in a co-ordinated move last week. Once upon a time Libor would have been close to the base rate, but this is no longer the case in these extraordinary times.
While Libor has a significant impact on fixed rate mortgages, variable rate mortgages are more influenced by the Bank’s base rate. Predictions are rife that this will be cut again before Christmas and could be slashed substantially in 2009.
This is in spite of yesterday’s CPI inflation figure reaching 5.2%. Many experts feel that this has peaked and inflation will come down sharply in the coming months. That would give the Bank of England much more freedom to cut the base rate in an attempt to boost the economy and the mortgage market.
Some forecasters believe the base rate could down as low as 2% in 2009, and there are predictions that inflation will be as low as 1% in 12 months time, following a period of economic deflation and slowing cost of living.
Nevertheless, there is little chance now of the UK avoiding recession which appears to be on our doorstep.
The Bank of England’s main aim is to keep inflation under control, which is why it resisted lowering interest rates for so long. It was only when the financial crisis became dire that it cut half a percent off the base rate last week.
