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Love's Libor's won?

21st October 2008 | back to article listings BACK    print this article PRINT

The recent banking bailout was a dramatic moment in British and international political and economic history. Billions upon billions of pounds were poured into a new Bank of England special liquidity scheme and in a recapitalisation fund that has seen the government effectively part-nationalising three banks in addition to the two lenders it has already brought under full state control.

Now comes the big question: Will it all work? This is of course critical to the UK economy, not in the sense of avoiding a recession that is widely regarded as inevitable, but in ensuring it is limited, shallow and short. This outcome is something which the Ernst and Young Item Club has predicted in the basis of lower interest rates, falling inflation, strong economic fundamentals and, of course, a more stable banking system.

As well as the general picture, however, there is also the specific issue of the property market and how much impact an increase in liquidity will have. According to Selwyn Lim, director at analyst firm Mouseprice, things could get substantially better soon if the government's grand plan works as intended.

He stated: "If it [the financial stabilisation package] is really successful then the banks will start lending again and the future will look a bit rosier."

Moreover, he suggested, further base rate cuts could also make "a very big impact on the future of the housing market".

What many will be keen to see is a sign that these things will start to happen. As far as interest rates are concerned, tomorrow's release of the minutes of this month's Bank of England's monetary policy committee meeting may contain clues as to how much the rate-setters believe inflation is set to fall in the months ahead, the factor that will determine how many rate cuts there will be and how soon.

Concerning the issue of liquidity, however, the signs are already promising, according to Darren Cook, a spokesman for finance website Moneyfacts. He noted yesterday that the London interbank offered rate (Libor) - which determines the cost of lending from one UK bank to another - has been creeping down in recent days.

He said the Libor rate is yet to fall to the sort of level it should be? in relation to the base rate - between five and 5.5 per cent, - but added: "I think it is a good indication that there is some liquidity coming back."

When Mr Cook was speaking yesterday (Monday) the three-month Libor rate had fallen to 6.11635 per cent, whereas on October 17th (Friday) it was 6.16000. Today the rate fell further to 6.085 per cent. While this may indeed mean that things are not yet back to where they should be, it may be taken as a positive indication that they are starting to head that way, paving the road towards a much swifter recovery than some doom-mongers fear.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4441.html. Alternatively, please see our full press release archive.

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