US interbank lending rates climbing again

Lending rates on dollar loans between banks increased again Thursday, reversing a one-day improvement and suggesting that banks are again becoming concerned with funding their operations.

The rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — rose about 0.02 percentage points to 2.20 percent, undoing Wednesday's decrease of the same size, according to the British Bankers' Association.

The one-month rate jumped a massive 0.47 percentage points, reflecting banks' worries they will not find enough capital for their balance sheets at the end of the year.

Rates had retreated Wednesday after rising for three consecutive days on news Citigroup Inc. had to resort to a rescue package from the U.S. government.

Tuesday's announcement by the Fed that it will inject another $800 billion into the U.S. economy in an attempt to boost consumer spending and home buying helped ease market concerns somewhat. But those improvements are proving short-lived.

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

Meanwhile, the rate for three-month loans in euros — known as the European Interbank Offered Rate, or Euribor — decreased over 0.02 percentage points to 3.88 percent, its lowest level since March 2007.

The equivalent rate for pounds fell to a five-year low of 3.93 percent Tuesday from 3.95 percent on Tuesday.

The European Union Wednesday announced that it wants EU governments to increase spending by euro200 billion (US$256 billion) over the next two years through tax cuts and other measures to boost growth and confidence among consumers and businesses.

All three lending rates remain significantly above their benchmarks set by central banks — 1 percent in the U.S., 3.25 percent in the 15-nation euro zone and 3.00 percent in Britain.

However, the spreads have fallen consistently over the last month or so 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.

Before the credit crunch began around August 2007 the spread between bank lending rates and official base rates was only around 0.5 percentage points.

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