Interest rates for three-month loans in dollars fell again early Wednesday, after three major central banks offered lenders unlimited dollars for the first time.
The London three-month rate for dollars decreased 9 basis points to 4.55%, Bloomberg News reported Wednesday. Meanwhile, a comparable euro rate dipped 5 basis points to 5.18% and the London interbank overnight rate, or LIBOR, fell 4 basis points to 2.14%.
The European Central Bank, Bank of England, and Swiss National Bank all offered lenders unlimited dollars for the first time, Bloomberg News reported.
Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.
Coordinated dollar offering helps
Economist Peter Dawson told BloggingStocks Wednesday the coordinated dollar offering, combined with Tuesday's $250 billion U.S. bank recapitalization by the U.S. Treasury, should keep short-term interest rates heading in the right direction: lower.
"The financial system is being re-liquefied, but don't look for a large fall in short-term rates, at least not initially," Dawson said. "It will take some time for sentiment to change, perhaps as long as a couple of weeks. But once we hit a critical mass of banks re-gaining confidence in lending, short-term interbank rates will move sharply lower."
Dawson said a normal rate for LIBOR is about 1%. A normal rate for the TED spread, which is the difference between what banks and the U.S. Treasury pay to borrow money for three months, about 0.50-1.25%.
LIBOR is particularly important because it determines rates on $360 trillion of financial products worldwide, from home loans to derivatives, Dawson said.
U.S. and European governments have now pledged as much as $3 trillion to unfreeze credit markets, meet demand for dollars, and recapitalize banks.
Monetary Policy / Economic Analysis: Another step forward for the credit markets. Short-term rates remain at elevated levels, but as long as they trend lower, that's progress.
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