Libor Rate Falls to Necessary Low
I have long believed that the LIBOR rate, at least in this credit driven economy, is one of the most important economic indicators. The 12-month LIBOR rate has consistently dropped and is now in range of where all previous economic recoveries began.
Common LIBOR Trend
When coming into, and out of, a recession, the LIBOR rate typically falls to one-half to one-third of the pre-recession highs. The recovery that soon follows is often inflationary as banks borrow from eachother and to consumers at lower rates to finance big-ticket items like homes, cars and other “durable goods.”
Where We Were, Where We Are
The 12-month LIBOR rate is generally the best indicator of financing and the availability of credit. August 2009 12-month rates, according to the WSJ, are 1.42%. This reflects well upon the current recovery, with the 12-month rate as high as 5.4% in January 2007. Also, the rates are well in line with the tech bubble recovery when rates dipped as low as 1.28% in September 2003 but maintained a 1.4% rate for much of the recovery.
Libor and the Big Picture
The Libor rate is the most free-market analysis of what the current interest rates should be. Though the Federal Reserve sets rates by controlling the supply side, the Libor rate is set by bids between banks. The current overnight rate is 0-.25%, though the 1month Libor is .27%. A low Libor rate suggests that banks are both well capitalized and willing to lend to other banks.
Interesting - thanks for sharing. Do you really think the banks are well capitalized? Further, do you really think the banks are lending? Finally, doesn’t lending require a consumer or business that is looking buy? I am skeptical that the LIBOR rate in and of itself is an INDICATOR of the economy. Rather, the rate is a tool which can be manipulated through intervention to achieve a desired econmic outcome. However, I must say this is not my area of expertise.
British Bankers’ Association here. This is an interesting discussion, to which we would like to add one brief point.
BBA LIBOR (to give it its full name) is a benchmark calculated by asking 16 prime banks ever day the rate they could expect to borrow unsecured cash from another prime bank. The banks do this in 10 currencies and 15 maturities (from overnight to one year). To calculate the benchmark we (well, ThomsonReuters) take those 16 data, discard the top and bottom four outliers and calculate the average of the middle eight. Any aberrant activity is immediately picked up on and investigated by the team which calculate the benchmark.
I suppose what I’m trying to explain is that LIBOR could not easily be manipulated through intervention, though of course it responds to external stimuli such as central bank rate changes. Recent studies by the IMF and Bank for International Settlements agree there is no evidence to suggest the benchmark has ever been manipulated in any way.
I hope this puts your mind at rest.
I still don’t see the banks lending, and the warnings of looming high inflation are overstated, or least that’s what I’m hearing. Recovery will be slow at best, and run in fits and starts.