LIBOR, SWAP rates, base rate and interest rates - we're seeing history being made

The Bank of England's decision to further reduce Bank Base Rates (BBR) in December, to rates not seen in over 50 years, demonstrates the analysts view of the severity of the current economic turmoil.  Whilst we don't appreciate it at this time, history is being made and events now will be talked about long after we are gone.

The reaction of the banks in setting LIBOR and SWAP rates over the past week have followed a similar trend to that displayed following the two previous BBR reductions in October and November.  As before, SWAP rates have reacted much quicker to the changes with 1 and 2 year money currently standing at 0.45% and 0.91% over BBR. These rates have fluctuated in the past few days, but the trend is still downwards from their peak in late June.  

LIBOR however, has again dragged its heals and although there has been much criticism of the banks to stimulate the flow of money, LIBOR remains well above BBR. Following the latest Bank of England rates decision, LIBOR sat at 1.72% above BBR.  This fell by 0.34% to 1.38% over BBR the next day, but this was the last significant fall.  Since then, LIBOR has fallen more modestly, but still remains stubbornly well above BBR.  As at today, it is 1.25% above BBR a far cry from the 0.02% below BBR in January 2008. 

As many lenders fund off of LIBOR, or set their rates for a 3 month period, it has meant that despite the reduction in funding costs, not many of the lenders have yet adjusted their rates.  Two of the best known names TMW and C&G have reset their Buy to Let rates this week and it is rumoured BM Solutions may have some new products just before Christmas.

 

With Christmas around the corner and some lenders also reaching their year end on 31st December, the speculation is for little activity from the lenders until January, when they will look to get 2009 off to a better start than 2008 has finished.

More needs to be done by the banks to ease borrowing rates.  The first signs have appeared in the residential sector, with new products in the mid 3% region, which appears to have increased the number of buyers in the market.  The lenders need to regain some confidence on buy to lets, hopefully this is not too far away.