LONDON - INTEREST rates on three-month dollar loans between banks fell for the second day running Wednesday while the equivalent European rates also fell ahead of Thursday's expected rate cuts from the European Central Bank and the Bank of England.
The rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - inched down by nearly 0.01 percentage point to 2.20 per cent, according to the British Bankers' Association.
Meanwhile, the rate for three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - decreased by nearly 0.04 percentage points to 3.75 per cent, its lowest level since January 2007. The equivalent rate for pounds fell to 3.79 per cent from 3.84 per centon Tuesday.
Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals.
Rates have been high in recent months as banks have hoarded cash and worried that other lenders might collapse and not pay them back.
All three lending rates remain above their benchmarks set by central banks - 1 percent in the US, 3.00 per cent in Britain and 3.25 per cent in the 15-nation euro zone.
The spread, or difference, between bank lending rates and the official base rate in Europe is narrowing quite sharply towards more normal levels. At only 0.50 per cent, the spread is back at the level it was before the credit crunch began around August 2007.
However, Mr Marc Ostwald, a strategist at Monument Securities, said the narrowing of the spread is 'largely cosmetic' ahead of this week's rate cuts in Europe.
While many observers think the European Central Bank will reduce its benchmark rate by half a percentage point to 2.75 per cent - with some thinking it may cut it by three quarters of a point- the Bank of England is expected by many to lower its rate by a whole percentage point to 2.00 per cent, which would be equal to its lowest level since the bank was founded in 1694.
'The narrowing of the spreads is more a function of what is being discounted in terms of rate cutting and I wouldn't be surprised that at Friday's fixing, the spreads will be back above 1 per cent,' said Mr Ostwald.
Nevertheless, spreads have mostly fallen over the last month or so from well over 1 per cent after massive intervention from governments and central banks - which on top of the latest fiscal stimulus plans included trillions of dollars in bank debt guarantees, pledges to rescue ailing banks, liquidity injections by central banks and interest rate reductions. -- AP
