The initiative by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction early Monday -- down -- as rates fell to their lowest level since the failure of Lehman Brothers on September 15.
The London rate for three-month loans in dollars declined for the 16th consecutive day, dropping another 17 basis points to 2.86%. The three-month rate for the euro, the Euribor, also fell 3 basis points to 4.74%. Rates also fell in Asia.
Meanwhile, the London interbank overnight rate, or LIBOR, decreased 2 basis points to 0.39%. In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, fell to 224 basis points, which is down from 364 basis points on October 10.
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.
Credit markets' steady progress is a good sign
Economist Peter Dawson said numerous hurdles remain in the ongoing struggle to normalize financial money flows, but policy makers can point to a success regarding credit market rates.
"Central bank infusions of dollars are having their intend effect -- they're getting bank-to-bank rates to come down, and they've improved the climate for commercial paper," Dawson said. "Major issues remain regarding the both consumer demand and business investment, but at least the money is in place to be invested and lent."
The LIBOR is particularly important because it determines rates on $360 trillion of financial products worldwide, from home loans to derivatives.
U.S. and European governments have now pledged as much as $3.6 trillion to unfreeze credit markets, meet demand for dollars, and recapitalize banks.
Monetary Policy / Economic Analysis: As economist Dawson noted, credit market liquidity is not tantamount to economic growth: banks have to lend and invest in businesses, amid confidence in consumer and commercial demand. In the U.S., that points to the need to find an economic growth catalyst.
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