FTSE 100 index rallied during the day, up more than 60 points at 6347 at 3pm GMT, as the 3 month sterling interbank LIBOR rate fell to 6.14% following continuing concerted central bank intervention that is starting to thaw the frozen credit markets.

However despite the sharp 0.5% drop in the 3 month LIBOR rate from 6.63% on the 12th of December to 6.14% today, the spread between the LIBOR rate and the base rate still stands at an elevated 0.64%. Whilst during a rate cutting cycle the expectations are for a neutral or even negative spread to the base rate. Therefore this clearly indicates that the banks are still reluctant to lend to one another and therefore the credit freeze remains intact.

It is expected that central bank intervention will continue to drive the spread lower towards 0.5% and therefore further easing in the LIBOR rate over the coming days is anticipated towards a target of 6%.

For further recent analysis on the interbank rate credit freeze see -

12 Dec 2007 - Worlds Central Banks to the Rescue with $110 billions
10 Dec 2007 - Bank of England Worried as Interbank Interest Rates Fail to Fall
07 Dec 2007 - Analysis of Interbank and Base Interest Rate Spread

By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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