Short-term interest rates continue to inch lower

Posted Oct 16th 2008 10:30AM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Financial Crisis

Short-term interest rates continue their downward trek, albeit at a snail's pace.

Overnight interest rates for dollars fell again early Thursday, after central banks provided $254 billion in emergency cash, Bloomberg News reported.

The London interbank overnight rate, or LIBOR, fell 20 basis points to 1.94%, Bloomberg News reported Thursday. The London three-month rate decreased 5 basis points to 4.50%.

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.

Trend indicates liquidity is improving, gradually

Economist Peter Dawson told BloggingStocks Thursday the Bank of England's delay in its closure of emergency borrowing and the European Central Bank's acceptance of lower-rated securities as collateral and its lending of unlimited amounts of euros over the next six months has broadened the credit landscape.

"Interest rates are coming down gradually, as private banks inch bank into various credit markets. Don't expect a major drop in short-term rates or a sudden rush to lend. That's not how these crises end. It usually takes weeks, then there is a tipping point where rates drop a lot, and the bulk of players re-enter the market," Dawson said. "Keep in mind that it took a lot longer than a few weeks for credit markets to tighten, so loosening them is not going to happen in a day or a week."

The 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 tiny step forward for the credit markets. Short-term rates remain at elevated levels, but as long as they trend lower, that's progress.

Tags: Bank of England, banking sector, banks, bond market, credit markets, ECB, European Central Bank, interest rates, inthenews, LIBOR, overnight interest