Overnight lending rates between banks fell today after emergency coordinated interest rate cuts around the world, but the cost of borrowing longer term stayed stubbornly high.
The interbank cost of overnight borrowing in dollars, euro and sterling fell toward central banks' new target rates of 1.5 per cent, 3.75 per cent and 4.5 per cent, respectively.
By late trading, the overnight rate on dollar deposits fell to 1.50 per cent, a far cry from the earlier 7.50 per cent, which signaled the continued distress in credit markets.
Monetary authorities in the United States, euro zone and Britain each slashed benchmark rates by half a percentage point, as did the Canadian and Swedish central banks, while China and Switzerland also cut rates.
The joint action to calm panicky markets followed the announcement of sweeping measures from Britain to support its banks, including a capital injection of up to £50 billion.
The rate cuts came after the British Bankers Association's daily fixing of London interbank offered rates (Libor), which had shown a fall in overnight euro and sterling rates, but a sharp jump in overnight dollars.
Following the rate cuts, the US Treasury sold $20 billion in prior government debt issues due to the intense safe-haven demand for them during the current financial crisis.
More Treasury supply can help boost activity in the repo market, a source of short-term cash for banks.
Three-month borrowing rates, or "term" funding, were stuck at lofty levels in dollar, euro and sterling at the Libor fix, reflecting the continued reluctance of banks to lend.
Analysts said it will take time for the rate cuts and the array of central bank liquidity measures to lower term Libor.
But the immediate impact of the coordinated rate cuts and extensive central bank liquidity injections into money markets should put a cap on rates.
Interbank deposit rates are merely indicative prices and not necessarily the rates at which banks actually lend to each other. The once-a-day Libor fix is also an indicative rate, but it is a global reference point for trillions of dollars of contracts for financial, corporate and household borrowing.
The spreads of Libor over anticipated policy rates measured by average Overnight Index Swaps widened, as investors priced in further broad-based policy easing in the coming months.
Before the coordinated rate cuts, the rate differences between overnight dollar, euro and sterling deposits and their respective Overnight Index Swaps were the highest in several years.
Reuters