HOA Nut House

The rate banks charge to lend to each other in dollars and pounds for three months rose again, signalling the unprecedented action yesterday by the world's central banks to rebuild trust between banks has so far failed.

By Angela Monaghan

Benchmark Libor for three-month dollar loans rose by 23 basis points to 4.75pc, and the equivalent rate for sterling loans rose by one basis point to 6.28pc.

The steeper rise in the dollar rate reflects the shortage of the US currency, which is the biggest money market with the most demand.

Those rises indicate that the moves by governments and central banks designed to ease the banking crisis have so far failed.

The three-month rate is particularly important to the wider economy as many banks use it as a base for determining the rate at which they will lend to companies.

By contrast to the three-month rates, the Libor rate for overnight dollar loans fell by 28 basis points to 5.09pc and sterling overnight loans fell by 40 basis points to 5.42pc.

This reflects the banks' willingness to lend to each other on a very short-term basis, because they are able make a better call on whether the bank they are lending to is likely to fail during that period.

Money markets, which began to break down during the summer of 2007, have been in deep freeze since the collapse of US investment bank Lehman Brothers, which was followed by a series of nationalisations in the US and UK, including Bradford & Bingley.

Nick Parsons, head of market strategy at NAB Capital, said: "There is a lot of liquidity in the dollar market at the short end. It's less risky for banks to lend overnight because everyone feels more comfortable about making a judgement on the solvency of a bank over 24 hours than 24 days."

Today was the first opportunity for the money markets to fully react to the UK Government's plan to part-nationalise some of the country's biggest banks, and to the co-ordinated rate cut in the UK, US and Europe.

In contrast to the dollar and sterling rates, three-month Euribor - the equivalent of Libor in euros - fell by five basis points to 5.386pc after the European Central Bank cut interest rates for the first time in five years yesterday by 50 basis points to 3.75pc. The overnight Euribor rate fell 41 basis points to 3.936 pc

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