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Libor rate latest

Updated:
6 January 2009, 12:48pm

Reader comments (50)

We explain Libor, its relationship with the bank rate and why it is so important in the credit crunch and for influencing mortgage pricing...

Commentary: The three-month sterling Libor rate fell from 2.65% to 2.61%, announced at 12.00pm on Tuesday, as expectations heightened of a substantial Bank of England rate cut this week and banks eased their lending following the year's end.

The UK bank rate was cut from 3% to 2% in early December but it has taken time for Libor to factor in that cut. The initial reduction was, proportionately, far less than after the previous rate cut.

In November, the bank rate was cut by 150 basis points and 107 points were shaved off Libor by the following day. This time, only 38 of the 100 points were immediately passed on.

Experts have suggested a significant narrowing of Libor vs bank rate will come in the New Year, as banks stop hoarding cash before year end. Financial results for banks, struck on 31 December, would then be able to show stronger cash balances. Alex Potter of broker Collins Stewart warned in the Mail on Sunday (9 Nov): 'Last year Libor fell sharply at the end of December and by mid-January it had fallen in line with the base rate. I would expect something similar to happen this year.'

The Libor rate so far this year:

The key three-month sterling Libor rate started the year marginally above 5.5% - broadly equal to the bank rate. It then climbed higher as the extent of the credit crunch emerged. It peaked at 6% in early April, despite the bank rate falling to 5% by that month, and then drifted down throughout the summer to a low of 5.7% on 12 September. A dramatic worsening of the crisis sent it up to 6.3% on 30 September (a 130-point gap with the bank rate). It has since plunged (see below) to factor in a fall in the bank rate from 4.5% to 2% but remains substantially higher than the bank rate.

Libor-bank rate gap

Before Nov 1.5-point bank rate cut: +1.06 points
Day afterwards: +1.49 points

Before Dec 1.0-point bank rate cut: +0.79 points
Day afterwards: +1.37 points

Latest gap: +0.61% points

LIBOR (THREE-MONTH RATE): 2.61% (06 Jan)

A recent history...

2.65% (5 Jan)

2.71% (2 Jan) | 2.77% (31) | 2.79% (30) | 2.82% (29)

2.87% (24 Dec) | 2.90% (23 Dec) | 2.94% (22 Dec)

2.98% (19 Dec)| 3.01% (18) | 3.05% (17) | 3.11% (16) | 3.13% (15)

3.19% (12 Dec) | 3.22% (11) | 3.25% (10) | 3.28% (9)| 3.32% (8)

3.37% (5 Dec) | 3.72% (4) | 3.79% (3) | 3.84% (2) | 3.88% (1)

3.91% (28 Nov) | 3.93% (27) | 3.94% (26) | 3.96% (25) | 3.99% (24)

4.04% (21 Nov) | 4.06% (20) | 4.10% (19) | 4.12% (18) | 4.15% (17)

4.18% (14 Nov) | 4.2% (13) | 4.31% (12) | 4.38% (11) | 4.42% (10)

4.49% (7 Nov) | 5.56% (6) | 5.68% (5) | 5.72% (4) | 5.77% (3)

5.84% (31 Oct) | 5.88% (30) | 5.91% (29) | 5.93% (28) | 5.95% (27)

5.98% (24 Oct) | 6.005% (23) | 6.04% (22) | 6.09% (21) | 6.12% (20)

6.16% (17 Oct) | 6.18% (16) | 6.21% (15) | 6.25% (14) | 6.27% (13)

6.28% (10 Oct) | 6.28% (9) | 6.28% (8)

• These rates are announced at between 11am and midday on these dates and reflect interbank borrowing from the previous night

See a full history of daily Libor spreadsheets on the BBA website (look for GBP - 3m):
- October 2008
- September 2008
- August 2008

See the impact on new mortgages with our deal finder

What is Libor?

It is the London Inter-Bank Offered Rate - the rate at which international banks lend to each other. It is calculated every business day in 10 currencies and 15 timespans, ranging from overnight to one year and is based on the level at which banks have been lending to each other.

When is it set?

It is set and announced at around 11am to midday for the UK rate, based on borrowing from the previous day. Operating since the mid-1980s, in the years before the credit crunch it sat marginally higher than the central bank rate.

'Undercover Economist' Tim Harford attempted to cut through the secrecy behind the compilation of Libor on his Radio Four show More or Less (14 December 2008): Listen here on the iPlayer (skip to 18 mins 20 secs) | More about the show

Why is it important?

It influences the level at which lenders set rates on loans, especially mortgages, to consumers and to businesses. It also impacts on the amounts they will lend. It is the rate at which banks lend to each other and is therefore a measure of how much they trust each other and a measure of the credit crunch. There tends to be a lag from when Libor changes to when bank lending rates are altered.

Also, mortgage deals have increasingly been linked to Libor rather than bank rate or a lender's SVR. That's because it is more closely linked to a lenders' costs.

What would Libor be in 'normal' conditions?

The three-month Libor rate should be just 10 or 20 basis points higher than the bank rate if conditions went back to how they were in the first half of this decade. So under pre-credit crunch conditions, if the bank rate or base rate is 2%, Libor should be 2.1% or 2.2%. But it soared far higher in August 2007, marking the start of the credit crunch. It recovered over the summer of 2008 (see the figures above) as some trust returned but then spiked on the collapse of Lehman Brothers (15/16 Sept 2008).

But shouldn't bank bailouts help bring down Libor?

That's the idea. But news of the $700bn US bank bailout failed to move Libor in the UK and it actually rose, heading above 6%. However, the UK's £40bn cash injection into banks on 13 October appeared to have had a positive but moderate effect with rates easing.

LATEST NEWS:

- Hang on - isn't it the big banks that set Libor? (10 November 2008)
Defenders of the banks say their mortgage rates derive from Libor and not the Bank of England - but that is no excuse not to pass on rate cuts, says the Evening Standard's Chris Blackhurst.

- Libor and bank rates (9 November)
It was a huge cut, says the Mail on Sunday's Lisa Buckingham, but for the wrong rate.

- Libor dives more than 1% to 4.49% (7 November 2008)
The key three-month Libor rate fell from 5.56% to 4.49% on the day after shock 1.5% bank rate cut.

- Libor lowest since collapse of Lehman (21 October 2008)
The interest rates banks charge each other for short-term loans fell to their lowest since before Lehman Brothers failed in September.

- A glimmer of hope as Libor eases (20 October 2008)
A tentative thaw in the frozen money markets was being called in the City today as interbank lending rates continued to fall.

- Banks begin to react as Libor falls again (16 October 2008)
Nervous banks are finally starting to respond to Gordon Brown's historic rescue package by lending more freely to each other.

- Libor rate finally begins to fall (15 October 2008)
Three days after the Government invested in UK banks the British Libor rate began to fall.

- Interest rate cut and bailout fails to move Libor (9 October 2008)
Libor is a measure of the credit crunch. It moved slightly higher rather than falling despite drastic rate cuts and a £500bn rescue package in the UK.

Don't miss...

- A full history of the credit crunch, including latest news and views

- How the credit crunch is affecting interest rate expectations

• This is Money has kept tabs on Libor for its readers in our interest rates round-up since July. We created this specialised Libor round-up in October.