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Editor’s commentary: The important three-month sterling LIBOR was at 0. Substantial falls between mid-June and have continued since. It is now down from a near-term peak of 1. 130bn plan to boost bank lending. That also made a base rate cut more likely. LIBOR soared during the worst phase of the credit crisis in 2008 and 2009 and then plunged as the authorities reacted to protect banks and push down the cost of lending. It then climbed higher last year amid the worsening eurozone crisis, hitting a peak of 1.
January this year, but has fallen back as central banks launch new firefighting measures. February to dish out colossal amounts of cheap cash to banks followed by the BoE’s more recent plan. The Bank of England had warned that inter-bank lending rates would push up mortgage rates if they kept rising. It rose steadily by fractional amounts throughout 2011 with the fastest rises in February and, even more rapidly, in August, September and October. These were the periods when markets were most febrile. It finally began to stabilise in late October on hopes of a euro rescue deal – just a resting period before rising fear pushed it higher in late 2011. Confidence between banks – which LIBOR essentially measures – was tested by fears of rate rises in early 2011 and then Middle East turmoil.
But it was the latest panic about a European sovereign debt crisis in July that spurred the biggest LIBOR rise. Rising LIBOR indicates that banks are eyeing each other with increasing suspicion. LIBOR fell to a record low of 0. September 2009, bobbed around that mark for a while and then began to edge higher. It stabilised a little above 0. Before the start of the 2007-08 credit crunch, the gap between the base rate and three-month sterling Libor was around 10 to 20 basis points.
2008 but then was back to ‘normal’ in late 2009 and 2010. In August and September 2011, it moved out of the ‘normal’ range again, although not to the extent seen in the credit crunch. The fear measure gap or ‘spread’, worryingly, increased from 25 points to 59 points in 2011, and was a rise from just 4 points at the post-banking crisis low in mid 2009. This gap was 10 to 20 points during ‘normal’ pre-credit crunch conditions. The key three-month sterling LIBOR rate was marginally above 5. January 2008 – broadly equal to the bank rate.