LIBOR Still at Credit Crisis Extremes as Banks Refusing to Lend

By: Nadeem_Walayat

The London Interbank Offered Rate (LIBOR) continues to fall from credit quake extremes, today falling to below 100 basis points (3 month) above the base interest rate that was cut in a panic move to 3% earlier this month. However as the below graph illustrates a 1% spread is still uncomfortably near credit crisis extremes and therefore implies that the banks are still reluctant to lend to one another which was confirmed by the Bank of England Governor Mervyn King who stated that extreme measures may be necessary to force the banks to lend again which in the final analysis implies nationalisation of the whole of british retail banking sector.

In total the UK Government has pumped over £320 billion into the banking system with another £300 approved for loans, loan guarantees and capital injections, much of the £320 billion has been utilised by the banks to rebuild their balance sheets instead of lending to consumers as originally intended as the lending increasing becomes a debt noose around tax payers necks as warned of in early October 08 - LIBOR Interbank Money Market Earthquake Signals UK Debt Recession and elaborated in UK Government Debt to Double, Tax Rises to Follow Tax Cuts

UK Interest Rates

UK interest rates have now been cut to 3% with the economic rate falling inline with the LIBOR rate to just below 4%. The expectations are for continued cuts in UK interest rates towards the 2% target, however the amount of debt the government seeks to borrow over the coming years implies that low interest rates may not stick around for very long.

UK inflation

This month UK inflation data as measured by the CPI slumped by the largest amount since the series began in 1997, falling from 5.2% to 4.5%, which was accompanied by BOE statements that UK economy would contract by 2% GDP during 2009, that puts the UK on target to experience a worse recession than that of the early 1990's as Gordon Browns boom turns to bust. The RPI measure which the BoE also warned was heading towards deflation i.e. a negative RPI during 2009 fell sharply from 5% to 4.2%.

More on the prospects for inflation in the imminent publication of the Market Oracle UK inflation forecast for 2009-2010, to receive this and other forecasts in your inbox subscribe to our always free newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 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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