Libor Unmoved by Government Rescue Package
It is going to take time for the Government’s financial rescue package to have an effect on the markets. That much was evident after the FTSE continued to fall and Libor rate did not follow the base rate down.
Although the surprising 0.5% cut in Bank of England base rate on Wednesday should help to bring variable rate mortgage down, it will have done nothing for those with fixed rate mortgages.
Fixed rate mortgages are more reliant on the swap rate or Libor (London Inter-bank Offered Rate). Unfortunately it looks as though the Government’s £500bn financial system rescue package has had scant impact on the money markets and the Libor. In fact, Libor rose slightly after the Government’s announcement.
In many ways Libor can be thought of as a measure of the credit crunch. It is calculated from ten currencies over 15 time zones and announced every day at 11am in London. On Thursday, the rate was at 6.28%, up from 6.27% on Wednesday. Libor is usually at a level just higher than the central bank rate. However, the gap between the old base rate (5%) and 6.27% is higher than normal. The overnight rate did ease back from 5.83% to 5.42%, but of course the gap with the UK bank rate actually increased from to 0.83 to 0.92.
It seems that, as yet, the Government rescue package has not put trust between banks back into the system. In addition, banks will be reluctant to use the extra facilities on offer unless they really have to.
Market watchers want to see a fall in Libor as an indication of an easing of the credit crunch, but it is recognised that the impact of the rescue package may take some time to filter through to the system, the markets and Libor itself.
On Wednesday banks and building societies in the UK signed up to an initial fund of £25bn, with £25bn made available to other firms. In addition, £200bn will be available for guaranteed short-term loans to try and improve liquidity and get banks lending to each other once again.
