LONDON - THE cost of three-month loans between banks fell further on Monday as the thawing of frozen credit markets continued ahead of this week's expected interest rate cut by the European Central Bank.

The interbank lending rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - fell around 0.10 percentage points to a near five-year low of 1.16 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 around 0.04 percentage points to a near three-year low of 2.65 per cent.

The equivalent rate for pounds fell about 0.05 percentage points to a fresh record low of 2.33 per cent in the wake of the Bank of England's half percentage point rate cut last Thursday.

Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals.

Rates have been high during the financial crisis as banks have hoarded cash and worried that other lenders might collapse and not pay them back.

Though the interbank lending rates have been falling consistently over the last few weeks in the wake of large interest rate cuts around the world and massive central bank liquidity provisions, all three rates remain above the levels markets think benchmark interest rates will be in three months.

Though the US Federal Reserve cannot cut its benchmark rate further from the current 0-0.25 per cent, the European Central Bank is widely expected to reduce its rate on Thursday from the current 2.5 per cent after a raft of downbeat economic activity data and lower-than-anticipated inflation. And the Bank of England is expected to cut its rates further in the coming months from the new record low of 1.5 per cent. -- AP