Sunday, 14 December 2008

Interest rate change affecting LIBOR rate

LIBOR is the daily reference rate based on the interest rates at which banks borrow unsecured funds from banks in the London wholesale money market (or interbank market). It is roughly comparable to the U.S. Federal funds rate, this you already knew. Its released daily by BBA with a one week rolling delay.
Graph shows how Bank of England Interest Rate changes have affected the spread of LIBOR in November and December.

So at the start of November we were more expensive than the Euro, until the interest rte change took all the UK LIBOR rates down to about the same level as the Euro, and the for the rest of the month the two currencies were pretty much on exactly the same course.

Now with December's rate cut, the more short term LIBOR rates for sterling have dropped a huge chunk below the Euro, and even encroach on the dollar.

Its kind of neat that the UK has the ability to control it's interest rates when necessary, innit.

Not sure why the dollar's short term rate have dropped compared to the Yen. The Yen is creeping up a bit though.

Is it possible to like short currencies? like if you borrow a load of yens and then lend them out as Euro at a higher interest rate? or does the currency exchange ratey commission piss all over any profits you'd make?

Hmph, I got bored late at night and had a look at the data for October.
It paints a slightly different picture. Looks like America was all over the place, uncontrolled, which might be a little terrifying if you're a banker. But the rest of the currencies seems quite level.

Well, sterling falls in great chunks when our Bank of England reduces interest rates, but the Euro LIBOR rate seems to be falling gently without central interest rate cuts and it seems to be falling at a slightly higher rate than sterling.

I don't know what it means.

Does it fall by a natural market supply and demand sort of thing, where supply of money for lending is out-stripping demand, so its getting cheaper? Cos if there was greater demand for interbank loans, but no one was willing to lend, then the LIBOR rate would drift upwards?

Wht would be an ideal picture here in the current economic climate.

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