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Interbank rates ease drives liquidity hopes

January 04, 2008 | "The Financial Times"

The rates banks charge to lend money to each other eased further on Wednesday – the first so-called fixing day of 2008 – boosting hopes that the worst of the liquidity squeeze might have passed with the tricky year-end period.

One-month sterling Libor declined the sharpest, down more than 20 basis points, the most since late 1999, to 5.746 per cent. Rates were down broadly across all major money markets, but remain elevated compared with where central banks have set interest rates in the US, UK and eurozone and compared with longer-term averages, suggesting banks and the money markets are not out of the woods yet.

Interbank lending rates in US dollars, euros and sterling have been declining since some of the world’s leading central banks acted to ease the liquidity crisis in mid-December by pumping billions into the banking system.

Banks have been hoarding cash and refusing to lend to each other mainly due to concerns about losses related to complex debt products and the vehicles that fund them.

“In the eurozone, one-month interbank rates have come down sharply since mid-December, reflecting increased efforts by the world’s central banks to ease pressures in the money markets,” said Rabobank.

“The swiftness with which longer-term money market rates come down over the next few weeks [provided they do, of course] should serve as a measure as to what extent financial institutions have been hoarding cash in the final weeks of last year.”

In the US, the difference between three-month interbank lending rates and the risk-free rate has narrowed from 61.4bp since the Fed announced on December 11 it would provide banks with direct access to central bank liquidity to 61.4bp on Wednesday.

“We think it will not take long until market participants realise that the [central banks’] money flooding cannot tackle the underlying root cause of the liquidity and credit crisis and that the problems have not simply disappeared with the turn of the year,” said Marcel Bross, analyst at Dresdner Kleinwort.

By Paul J Davies in London and Saskia Scholtes in New York

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