B of E Vs LIBOR
We have all become uncomfortably aware of the recent problems in the financial sector over the past few months and whilst the Bank of England has reduced interest rates on a number of occasions over the past six months, consumers have not seen any benefit from these rate reductions reflected in their monthly loan and mortgage repayments and many are complaining that their lender is not passing on these savings.
The main reason for this is that although the Bank of England is doing its best to help lenders, both with rate cuts and a recent £50bn cash injection into the banking sector, this is not what governs the rate of interest paid by the average man in the street on his mortgage or loan.
This is actually dictated more by LIBOR (London Inter Bank Offered Rate), which is the rate of interest at which banks and other financial institutions are prepared to lend to each other. The problem is that although the Bank of England base rate is decreasing, at the same time LIBOR is actually increasing. The B of E base rate currently stands at 5.0%, LIBOR, however is closer to 6%.
The fact that LIBOR is so high in comparison with the base rate shows that lending institutions lack confidence in the sector generally and in particular the liquidity issues being faced by many banks and lenders. Several major banks and building societies have been forced to raise rights issues with their shareholders to restore liquidity and the full impact of losses in the sub-prime mortgage and loan markets are not yet fully known.
Even once liquidity has been returned to the financial sector as a whole, it may still be some time before confidence fully recovers and only then are we likely to see a drop in the LIBOR rate. The best way to judge whether or not the money markets are recovering therefore, is to watch for a reduction in LIBOR rather than the Bank of England base rate.
