U.S. Libor breaks above 1 percent for first time since 2009

(Reuters) - The interest rate banks charge each other to borrow dollars for three months rose above 1 percent on Wednesday for the first time since May 2009 as global rates extended their climb on expectations of accelerating growth and inflation.

U.S. dollar notes are seen in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration

The London interbank offered rate, or Libor, for three-month dollars was fixed at 1.00511 percent, the highest level since 1.00688 percent on May 1, 2009, which was also the last date the rate topped 1 percent.

That compared with Tuesday’s rate of 0.99872 percent.

Libor, which is a global rate benchmark for $350 trillion worth of financial products worldwide, has risen nearly 0.40 percentage point from a year earlier.

In the United States alone, Libor is used to set interest rates on mortgages, student loans and floating-rate corporate debt. Interest payments on at least $10 trillion worth of loans and about $150 trillion to $160 trillion in the notional value of derivatives are pegged against Libor, according to the Office of Financial Research.

Libor’s rise began in mid-2016, spurred by a recovery in oil prices and reduced fears about a global drag from Britain’s surprise vote to leave the European Union.

Investors upgraded their outlook on business activity following Donald Trump’s victory in the U.S. presidential election, anticipating that a Republican-controlled White House and Congress would slash taxes, implement infrastructure spending and loosen regulations.

That view was coupled with the Federal Reserve’s signal last month that it might raise interest rates up to three times in 2017 as the economy approaches full employment and inflation heads toward its 2 percent goal.

The Fed’s signal for further rate increases stemmed from expectations of possible fiscal stimulus under a Trump administration, according to minutes from the Fed’s most recent meeting on Dec 13-14 released on Wednesday.

At that meeting the U.S. central bank raised its target range on short-term interest rates by a quarter point to 0.50-0.75 percent.

Eurodollar futures implied traders expected three-month Libor to reach 1.54 percent at the end of this year, which would be the highest level since December 2008 during the height of global credit crisis.

Reporting by Richard Leong and Dan Burns, Graphic by Jiachuan Wu; Editing by Paul Simao and Chizu Nomiyama