The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Wednesday -- down -- as private banks were encouraged by commercial paper purchases by the U.S. Federal Reserve and a likely interest rate cut later today.
The London rate for three-month loans in dollars declined for the 13th consecutive day, dropping 5 basis points to 3.42%. The three-month rate for the euro, the Euribor, also fell 2 basis points to 4.83%, and the three-month rate for Hong Kong dollars, the Hibor, dropped 30 basis points to 3.54%.
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.
Fed commercial paper, likely rate cut ease credit
The Fed has started buying commercial paper from U.S. corporations and is expected to lower benchmark, short-term interest rates today. Private bankers are likely to be gladdened by each, so says economist Peter Dawson.
"There is a sense of some momentum building now, regarding lower bank-to-bank rates. Of course, we could always see another shoe drop with another bankruptcy that could retard further progress, but each day it's becoming clear to more banks that hoarding dollars doesn't make a whole lot of sense," Dawson said. "Hoarding dollars is becoming increasingly irrational, which is a good sign for the credit markets."
Dawson also said he expects the Fed to cut its benchmark interest rate by 50 basis points to 1.00%. The Fed will announce its decision today at 2:15 p.m. EDT.
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 $3.2 trillion to unfreeze credit markets, meet demand for dollars, and recapitalize banks.
Monetary Policy / Economic Analysis: Another decent start to the credit market day in London on Wednesday. Credit market liquidity continues to improve -- an essential for daily business operations. Still, as economist Dawson noted, functioning credit markets do not mean economic fundamentals are strong. In the U.S. and Europe they are weak, and policy makers must undertake tactics to stimulate growth to get the world's regional economies moving again.
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