In Article 6 in the book you will see a definition of the Libor rate (on page 31). It is:
"the rate used for loans made to low risk banks in the London money markets. You can get a Libor rate for a wide range of money market maturities. It starts with overnight money and then goes to one month, three months, six months and one year".
This is perhaps the key variable in the UK money markets as it is the rate at which banks can access the extra funds that they need on a daily basis. When this market fails to work efficiently this has serious implications for all financial markets as well as the general economic outlook. For many months the UK 3-month libor rate has remained well above the Bank of England's repo rate. However, there are signs that at last the UK money markets are starting to thaw which suggests that the banks might soon be able to start lending again to small companies and ordinary households.
3-month libor (the main benchmark) fell to just 2.61% today. This is is just 61 basis points (basis points are explained on page 50 in the Key Terms section) above the official repo rate. It should be said that this is still much higher than it should be. However, at least it is now heading in the right direction. You can follow the level of this rate on the front of the FT each day.
Jan 6, 2009
As we freeze Libor thaws!
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3 comments:
We have .13 points difference between 1 week REPO and LIBOR rate on 2nd Feb 2009. On 2nd Feb 2009, REPO rate for 1 week was 1.26333 and Libor rate was 1.3975. If the market is not much liquid why there is very less difference between REPO and LIBOR? Does it really make sense? Do you say it a big difference or small difference (how big is big), so I checked the LIBOR rate and REPO rate for DEC 2000 as we consider it a good economic period when dot com bubble was on its peak at that time. I found difference between LIBOR and REPO was only of .15 points (LIBOR was 6.09625 and REPO was 5.94167 and DEC 1st 2000). !!!!!! . How come the difference is almost same between LIBOR and REPO in good economic time and bad Economic Time?
Thanks for the comments.
Firstly, we should compare the difference between Libor and Repo in terms of basis points. So using the current data the margin = 25 bp. This is arrived at as Libor (1.25%) minus Repo (1%) = 0.25 = 25 basis points. This is a large margin by historical standards. However, it was even worse in November 2007 during the Northern Rock crisis.
Hello
Thank you kevin for answer. Thanks for clear me the basis point system. It is a big margin as million of £ can earn good cash if use wisley.
Ahsan
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