Libor – up it goes

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Back when the “credit crunch” started, we all suddenly started talking about Libor (the inter-bank lending rate). We saw Libor shoot up, and cause all sorts of liquidity problems for banks. A rapid series of rate cuts by the Bank of England ameliorated this to some extent, and in last the year or so Libor has been broadly stable.

But this is an indicator which wasn't stay out of the limelight forever. As the Guardian flagged up yesterday

The key measure of financial stress in the British banking system - Libor, the London Inter-Bank Offered Rate - rose again this morning to within a wafer of 1% for the first time since the 2008 financial panic.…the banks are [now] charging each other almost twice as much as the Bank of England's base rate of 0.5% to borrow money for three months.

Libor starts to creep upSpread between 3-month inter-bank lending rate and Bank of England base rate

Source: Bank of England

The spread between Libor and the base rate is only part of the story. With the base rate still at 0.5% the actual Libor rate of 1.03% is markedly lower than the rate of 6.85% the measure hit in September 2007. But the fact that Libor is starting to creep up suggests that Eurozone fears may be spreading to the British banking system. A worrying sign: Libor is a measure to watch.

This is the backdrop as the Monetary Policy Committee announces its latest monetary policy decision. Having announced a four-month program of asset purchases last month, it is unlikely that the MPC will go further today, though as uncertainty spreads, further monetary easing in the next few months cannot be ruled out.

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