US, European interbank lending rates down again

Key interbank lending rates in the U.S. and Europe fell further Tuesday, suggesting that lower borrowing costs, massive liquidity injections from central banks and government efforts to shore up the banking system are gradually bearing fruit.

The rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — dropped around 0.06 percentage points to 2.1750 percent, its lowest level since October 2004. Dollar rates have fallen for 22 straight working days.

Meanwhile, the rate for three-month loans in euros — known as the Euro Interbank Offered Rate, or Euribor — fell around 0.07 percentage points to 4.32 percent, its lowest level since January 24. And the rate in British pounds declined around 0.055 percentage points too to 4.3750 percent, its lowest level since April 2004.

Despite the ongoing falls in lending rates, the spreads between lending rates and central bank base rates remain above 1 percent and nearly twice as large as they were in mid-September, when Lehman Brothers went bankrupt. Benchmark rates in the U.S. are 1.0 percent, 3.25 percent in the 15-nation currencies that share the euro and 3.00 percent in Britain.

Before the credit crunch, widely considered to have begun in August 2007, the spread between bank lending rates and official base rates was only around 0.5 percentage points and in much calmer times was around 0.2 percentage points.

Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals. They skyrocketed in recent months as banks worried that other lenders might collapse.

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