NEW YORK Last week's spike in Libor offers a
more accurate depiction of the borrowing costs between U.S.
banks, and suggests that in order to loosen up credit markets
the Federal Reserve will take measures in addition to a likely
25 basis point cut in interest rates this month, Citigroup
analysts said on Monday.
Elevated bank costs have been one of the road blocks the
Fed has tried to remove in a bid to encourage lending across
the financial system and stimulate a flagging U.S. economy.
The London interbank offered rate on three-month U.S.
dollar deposits jumped 20 basis points last week, as traders
sharply pared bets the Fed will lower its federal funds target
rate by 50 basis points.
Fed officials on Friday hinted they were reluctant to cut
interest rates further as the economy also faces a threat from
Libor is a global rate benchmark for floating-rate consumer
and corporate loans, It is also a basis for numerous
exchange-traded and over-the-counter financial instruments.
If Libor continues to rise, it would essentially cancel out
the expected quarter point cut by Fed at its two-day policy
meeting next week, and cause policy-makers to take more
aggressive steps to deal with the credit crisis, Citi analysts
Scott Peng and Alexander Tyo wrote in a research note on
"This may induce the Fed to explore other avenues of
liquidity injection such as quantitative easing," Peng and Tyo
said in the research note.
They were referring to a monetary policy move implemented
by the Bank of Japan in 2001 with the goal to revive that
country's economy which was stagnant for a decade. Quantitative
easing entails flooding the banking system with excess
reserves, resulting in pushing the benchmark overnight bank
lending to zero.
There has also been growing speculation that banks surveyed
by the British Bankers Association daily for Libor have been
understating their actual borrowing costs in a move to mask
their cash needs.
"A more accurate portrayal of the interbank lending rate
could make the Fed's job more difficult as expectations of a
wider bank premium may nullify a significant portion of the
next 25 basis point cut in the Fed funds rate," the Citi
In an April 10 research report, the two Citi analysts
estimated three-month Libor fixing understated the true
interbank loan costs in a range of 20 basis points to 30 basis
On Monday, three-month dollar Libor was set at 2.92000
percent, up 1.750 basis points from Friday.
Last week, the three-month borrowing cost on overseas
dollar deposits recorded its biggest weekly rise since
mid-August in the start of the current global credit crunch.
The Fed and other central banks have enacted a number of
maneuvers to inject cash into the global money system. But
those liquidity moves have been mitigated by the ever growing
losses suffered by Wall Street and banks worldwide due their
mortgage investments that soured during the U.S. housing slump.
(Reporting by Richard Leong; Editing by Leslie Adler)